Under the Truth in Lending Act (Regulation Z), a returned-payment fee is "any fee imposed by the creditor for a returned payment."
A returned-payment fee is assessed when your payment does not successfully process, for example when a check bounces or an ACH automatic withdrawal is returned for non-sufficient funds (NSF), a closed account, or stopped payment. The lender or biller may charge a flat fee disclosed in the agreement, and your own bank may separately charge an NSF or overdraft fee for the same returned item. Because the payment did not clear, the underlying amount typically remains due, and a late fee may also apply if the payment is now past its due date. The conditions and amount of a returned-payment fee are set in the loan or account agreement.
A payment can be returned for several reasons: not enough money in the account, a closed account, a stop-payment order or incorrect account details. When that happens, the payment is treated as if it was never made, so the original amount is still owed and may now be late.
Two separate charges can follow one returned payment: the creditor's returned-payment fee under the loan agreement, and the bank's own charge for the returned item. Confirming that an account has enough in it before a scheduled payment, and updating account details after changing banks, are the usual ways to avoid both.
For credit card accounts, federal rules limit returned-payment fees and bar issuers from charging both a late fee and a returned-payment fee for the same event. Rules for installment loans come mainly from state law and the loan agreement, so the agreement is the place to confirm what applies to a particular loan.
An example
A borrower's automatic payment is scheduled for the day after payday, but the paycheck deposit is delayed. The withdrawal is returned for insufficient funds. The lender charges a returned-payment fee under the agreement, the borrower's bank charges its own fee for the returned item, and the loan payment is still due. The borrower makes the payment another way once the deposit arrives.
Common misconceptions
Myth: A returned payment counts as paid.
In fact: If the payment does not clear, it is as if it was never made; the amount remains due and a late fee may also apply.
Myth: The lender's fee is the only cost of a bounced payment.
In fact: The borrower's own bank may charge a separate fee for the same returned item.
Myth: Only paper checks can be returned.
In fact: Electronic payments, including automatic withdrawals, can be returned for the same reasons as checks.
What to check
- Whether the agreement lists a returned-payment fee.
- How payments are collected, and whether any are pulled automatically.
- What happens to the due date if a payment is returned.
- Whether your own bank charges for returned items.
How this applies at Desert Rock Capital
Desert Rock Capital never takes pre-authorized debits and never holds a post-dated check. Customers make voluntary payments toward their loan account, and you do not need a bank account to borrow. Any charge that can apply to a loan is disclosed in the loan agreement before you sign anything.
Based on our loan requirements, loan amounts and application pages. Your actual terms are in the loan agreement.