Dangers of online payday loans cited
By Amy Baldwin
Knight Ridder Newspapers
CHARLOTTE, N.C. — Consumers who turn to the Web to take out payday loans pay exorbitant fees and risk getting mired further in debt, while the lenders are skirting many states' laws. That's what the Consumer Federation of America says in a study on Internet payday lending released this week.
According to a survey of 100 online payday lenders by the Consumer Federation of America: Loans ranged from $200 to $2,500, with $500 being the most frequently offered. Some states cap payday loan amounts. Finance charges ranged from $10 per $100 to $30 per $100. The most frequent rate was $25 per $100, or 650 percent annual interest rate (APR) if the loan is repaid in two weeks. State laws on maximum interest rates vary. Thirty-eight sites disclosed APR for loans to consumers before the application was complete, while 57 percent disclosed the finance charge. State laws on disclosure also vary. When it comes to repayment, many online lenders automatically renew the loan if not repaid by withdrawing the finance charge from the borrower's bank account. Sixty-five lenders allow loan renewals even with no payment toward the principal. Fewer than half the lenders provided a physical address or phone number. About a fourth of the lenders listed no contact information on their Web sites, while the rest provided contact only via e-mail.
The group, which advocates regulations for payday lending that better protect consumers, surveyed 100 Internet payday lenders.
Survey results
Among its findings: These lenders offer bigger loans than some states allow — up to $2,500 — and charge higher interest rates than some state laws allow, with annual interest rates of 650 percent or higher. Some make loans in states, such as North Carolina, where payday lending is illegal and in states, such as South Carolina, that allow payday lending at brick-and-mortar stores only, not on the Web.
"Internet payday loans are dangerous for cash-strapped consumers," said Jean Ann Fox, the federation's director of consumer protection. "They combine the high costs and collection risks of check-based payday loans with security risks of sending bank account numbers and Social Security numbers over Web links to unknown lenders."
Some online payday lenders advertise that they do business in all 50 states, Fox said.
A payday loan industry spokesman said the federation is working against the industry, not with it, and that as a result consumers in some states are not protected.
"They want to put everybody out of business and don't want to work with the industry," said Steven Schlein, spokesman for the Community Financial Services Association of America, which represent primarily brick-and-mortar payday lenders but has a few online members.
Payday lending works like this: The borrower gives the lender a postdated personal check or authorization for automatic withdrawal from a bank account, and in turn receives cash, minus the lender's fees. A $300 check might yield $280 in cash. The lender holds the check or debit authorization until the borrower's next payday. Then the borrower can pay back the check amount in exchange for the check or allow the lender to cash the check. Or the borrower can renew the loan by paying another fee.
The online method works much the same way, only the federation says some lenders will automatically renew loans if not repaid by extracting cash from borrowers' accounts.
The federation also says consumers have had trouble canceling transactions or resolving problems with lenders, many of which do not provide phone numbers.
