Consumers who rush online to find a quick-fix loan, here is a warning for you: Watch out for hidden or unexpected fees. They could add up to hundreds or thousands of dollars.
The Federal Trade Commission has charged the LendingClub with falsely promising consumers that they would receive a loan with “no hidden fees.” But the FTC claims that LendingClub actually ended up deducting sizable fees up front from loan amounts that consumers received.
Imagine expecting a loan for a set amount to cover a major home repair. So you borrow $10,000. But then only $9,500 shows up in your bank account.
Financially strapped consumers are increasingly going online to shop for unsecured personal loans. They could, for example, be looking for a lower-cost way to consolidate credit-card debt.
According to the FTC’s complaint, one consumer applied for a $30,000 loan in order to consolidate his credit card debt at a lower interest rate. But after LendingClub deducted a $1,200 up-front fee, the consumer “was unable to pay off his credit card debt in full, leaving him with more bills to pay than he had before.”
Another consumer outlined in the FTC complaint reported that he applied for a $15,000 loan to cover relocation expenses, and was surprised to receive only $14,000 — an amount insufficient to cover his relocation. A $1,000 up-front fee was charged.
LendingClub has denied wrongdoing.
“In this case, we believe the FTC is wrong, and are very disappointed that it was not possible to resolve this matter constructively with the agency’s current leadership,” LendingClub said in a statement.
LendingClub said it has provided more than two million people access to low-cost credit in more than a decade and promotes transparency in the online lending industry.
“The FTC’s allegations cannot be reconciled with this long-standing record of consumer satisfaction that’s reflected in every available objective metric,” the LendingClub said.
But some consumers, particularly those in a rush, might easily be tripped up.
“Today, the loan options are many and they’re confusing,” said Janet Raffel, senior manager of financial capability at NeighborWorks America, a nonprofit network.
“We know that emergency expenses come up and we know that income volatility is a reality,” she said. “Americans don’t have a lot in savings.”
About 38 percent of households with incomes below $75,000 have no money saved for an emergency, according to a recent NeighborWorks survey.
The number jumps to 59 percent of those with incomes below $20,000.
But Raffel said consumers might want a second set of eyes, such as a financial coach who can be found at the NeighborWorks network, when considering applying for a personal loan online.
Consumers would want to understand, for example, what fees are involved and what kind of terms they might expect with a loan based on their own credit score.
If possible, talk to someone on the phone or through an online chat at the lender’s site to better understand the terms.
It’s essential to know what kind of questions to ask, too. Such as, is there an origination fee?
The FTC alleges that the LendingClub deceived consumers by promising “no hidden fees” and then charging an up-front fee that “is not clearly and conspicuously disclosed.”
“This case demonstrates the importance to consumers of having truthful information from lenders, including online marketplace lenders,” said Reilly Dolan, acting director of the FTC’s Bureau of Consumer Protection in a statement.
“Stopping this kind of conduct will help consumers make informed choices about loan offers.”
Consumers must pay interest on the entire “loan amount,” including the fee, even though they only obtain a reduced amount, according to the FTC complaint.
The “hidden fee leaves consumers paying interest on principal that they never received,” the FTC noted.
Information found online in early May for the LendingClub’s personal loans at Quizzle.com stated: “No prepayment penalty, no hidden fees.” But click on the line that says “Show Disclaimer.” Then, you’d see the fine print that indicates “the origination fee ranges from 1 percent to 6 percent and the average origination fee was 5.47 percent as of Q3 2016.”
The origination fee is deducted from the loan amount you’d receive. The disclaimer information points out that a 1 percent origination fee on a $10,000 loan amounts to $100. Meaning, you’d receive $9,900 in that example.
Of course, if the fee ended up being at the top end at 6 percent, the fee would add up to $600 and you’d receive $9,400. But the example doesn’t list the math that could get you to $600.
The fine print also reads: “There is no down payment and there is never a prepayment penalty.”
The FTC said consumers who found out about the up-front fee frequently complain that they only discovered that fee after the LendingClub disbursed their loan proceeds and they suddenly noticed the amount was smaller than what they were expecting to receive. The FTC said LendingClub’s online application flow included some “buried disclosures.”
Unsecured personal loans are available from different lenders online, including other peer-to-peer lenders such as Prosper and SoFi. As part of the peer-to-peer lending platform, borrowers apply online for loans and individual investors can open an account to set aside money to back such loans.
Peer-to-peer lenders have changed the way people borrow and make personal loans more accessible.
Other big-name lenders offer personal loans online, as well. Quicken Loans entered the personal loan market in 2016 with RocketLoans, which offers unsecured personal loans of $2,000 to $35,000.
For consumers, rates and fees will vary based on their creditworthiness. Many lenders practice risk-based pricing.
Consumers with fair to poor credit typically would be slapped with higher origination fees and interest rates because they are seen as a bigger credit risk. Some lenders focus on making personal loans to consumers with good to excellent credit.
Not all lenders charge an origination fee, but many personal loan lenders charge that fee. So figure out how high your fee would be in advance based on your creditworthiness.
Compare annual percentage rates on your interest rate for various lenders.
RocketLoans, for example, has an origination fee of 1 percent to 6 percent charged to each loan. The Quicken site notes: “The fee will be deducted from the balance of the loan before the funds are disbursed to the client.”
RocketLoans also notes online: “Qualified clients using RocketLoans will see loan options for a 36- or 60-month term, and APR ranges from a minimum of 5.983 percent (rate with autopsy discount) to a maximum of 29.99 percent (rate without autopsy discount).”
If you understand there is an origination fee, some suggest that a consumer who is trying to cover a specific cost might want to request a bigger loan in order to get the full amount you’d need.
Being in a financial jam isn’t easy. But the situation can only grow more frustrating if you don’t take the time to understand just what that quick-fix loan involves.