P is for Protecting Yourself from Online Payday Lenders
Personal Finance from A to Z
Eileen St. Pierre, The Everyday Financial Planner
You see them on street corners, in strip malls, and near military bases – payday loan stores. Financial advisors all agree that payday lending in any form can trap consumers in a debt spiral. As more states are passing laws to curb payday lending, many lenders are turning to the internet to try to bypass these laws. Online small-dollar loans, which average around $400, are expected to grow to 68% of the total payday loan market by 2016.
Borrowers are asked to send personal information, bank account numbers, Social Security numbers, and employment information over the internet either directly to unknown lenders, or through a lead generator who will then market your application to lenders. This alone should be a red flag.
According to the Federal Trade Commission, just entering this information on an online application without submitting it may come back to haunt you. Your information may be captured and sold.
Consumers may not realize their rights may be taken away. These contracts can include many one-sided terms such as:
- Mandatory arbitration clauses
- Agreements not to participate in class-action lawsuits
- Agreements not to file for bankruptcy
- Requirement to keep account open until loan is repaid
- “Voluntary” wage assignments
At a traditional payday loan store, borrowers give the lender a post-dated check for the amount of the loan plus a fee as collateral. However, online lenders require the borrower to give them debit access to their bank accounts. At the time the loan is due, the lender automatically deducts enough to cover at least the finance charge. Usually the loans are automatically renewed for another finance charge.
According to the Consumer Federation of America, the most common finance charge is $25 for every $100 borrowed.
- If you take out a 12-day online loan for $400, you will have to pay an additional $100 in fees.
- If you automatically renew the loan after you get paid, it will cost you another $100.
- Suppose you finally pay the loan off after 6 months (15 loan cycles). You will have paid $1,500 in fees for that $400 loan. Can you think of better uses for that $1,500?
What do you do if you suspect a loved one is involved with online payday lending? Contact your state’s Attorney General. The AG’s office can investigate whether the online lender is legitimate. The Consumer Financial Protection Bureau regulates these lenders at the federal level.
What’s your best defense? Never get involved with payday lenders in the first place. Visit my Debt Management page for more information.