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They reach into your bank account
Lender sets the schedule
That reverses how a credit card works. With a card, the borrower decides when to pay and how much. Here the lender sets the schedule, and on the day a loan is due the money comes straight out of the account.
When loans stack up
One loan is easy to keep track of. But a person can hold several at once, and it is not uncommon to find someone with a dozen or so loans out. Then payments are zapping out of the account every couple of days, nobody can follow all the due dates, and overdraft fees start landing on top of the cost of the loans.
Built for speed
The loans are built to be fast, which makes stacking them easy. A $6,000 credit line can show up five minutes after downloading an app, along with a list of merchants to spend it at.
Why do overdraft fees pile up with stacked loans?
An overdraft happens when a withdrawal is larger than the money in the account. The bank may cover the payment anyway and charge a flat fee, which at large banks has often been around thirty dollars per event. Several loan payments landing in the same week can each trigger a separate fee. The Consumer Financial Protection Bureau has tracked overdraft fees as a multibillion dollar yearly revenue stream for banks.
How does pulling a payment differ from card billing?
A credit card sends a monthly statement and waits for the borrower to pay any amount above a minimum. Automated loan payments are usually submitted to the borrower's bank on the due date, either over the ACH network or through the debit card. The ACH network is governed by Nacha and settles payments in batches several times each business day. It handles tens of billions of payments in a year.
How can a credit line appear in five minutes?
Lenders use automated underwriting, which scores an applicant in seconds from data such as bank account history, device information, and a soft credit check. A soft check does not leave the mark on a credit report that a full application does. Many apps read the applicant's bank transactions through a data aggregator such as Plaid. Plaid, founded in 2013, is one of the best-known services that lets apps read bank data with the customer's permission.
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