A payday loan is supposed to be short term loan that provides quick cash to people with debt problems. They are typically backed by the borrower's next paycheck. Borrowers provide the lenders with either a post-dated check or the routing and account number to a bank account so the loan can be repaid on the next payday.
Monsters on the Net
Taking out an online payday loan seems to be an easy transaction. But for many people who have turned to them in a moment of crisis, the decision to use them has come back to haunt them.
The Consumer Federation of America recently took a survey of twenty different online payday loan websites. What they uncovered would be enough to put a scare into anyone. Here's what the loan companies keep buried in the fine print:
- The default payment plan for most online loans is finance charge only, meaning the full amount of the loan is seldom taken on the next payday. This means that the borrower ends up paying interest only (at very high interest rates) for the first few payments. The borrower must ask the lender to take the full amount owed on the first payday, in advance of when their paychecks are cut.
- Online lenders are nearly impossible to locate. Often they will not provide an address, offering only a telephone number or e-mail address to the troubled lender. Others are based outside of the United States. These hidden locations make it difficult to take recourse against them or to list them on a bankruptcy petition.
The trouble with payday loans do not stop there. Although some states, such as Illinois, have rate caps on the annual percentage rates, many loan companies claim state laws do not apply to them because of tribal immunity. According to CBS News, approximately 30% of all online loans are owned by American Indian tribes. The rate cap in Illinois is 404%.
Scary Reality for Borrowers in Minnesota
Most borrows have payday loans have troubles paying them back. According to the CFA, 75 percent of all payday loans are taken out to pay off prior loans that the debtor could no longer afford.
With interest rates that are so high, stringing borrowers along is hard to resist. Lenders actually make it difficult to pay the loan off. Borrowers either have to provide notice well in advance of the loan's due date or they have to scour the lender's website to locate the repayment terms.
Perhaps the most frightening aspect of online payday loans is that it is difficult to stop them once you get started. Online lenders typically require a borrower to authorize the lender to create a demand draft for the balance of the loan or they issue a single payment loan. Both of these methods make it impossible for the borrower to revoke their authorization under the Federal Electronic Funds Transfer Act.
Source: www.consumerfed.org, "CFA Survey of Online Payday Loan Websites," August 2011