| Online
payday loans: Borrower beware | | |
| The growth of online payday lending
is presenting problems for state law enforcement officials and consumer advocates.
Earlier this year, the Massachusetts Office of Consumer Affairs and Business Regulation
ordered 91 companies marketing Internet payday loans to stop. The companies were
reportedly charging annual percentage rates averaging 300 percent and fees averaging
$30. The state says none of the companies were licensed to offer loans to residents.
"Some of the letters we sent to these companies were returned
when the post office was unable to find the address," says David Cotney, senior
deputy commissioner at the Massachusetts Division of Banks. "That reinforces our
concern about consumers handing over personal information. That's one of the reasons
licensing is required; it gives the consumer some recourse." James
Brusselback, enforcement chief at Washington State Department of Financial Institutions,
says his division is investigating some 10 online payday lenders. "The
difficulty with the online outfits is in locating them, and then some of them
claim that our state law doesn't apply to them, so we have that issue of trying
to bring them under our state law. I guess part of their argument is that they're
not located in the state and that their home-state law is sufficient to protect
their customers. The requirements in those states -- Nevada and Utah -- are far
less than what we require." Karolyn Klohe, financial legal
examiner in Brusselback's department, says consumers can have a tough time stopping
online payday lenders from taking money out of their accounts. "A
common complaint against online payday lenders is that the customer is required
to give banking information, whereas if they walk into a payday lender store they
give them a postdated check. But what's happening online is the payday lender
uses the bank information to make unauthorized withdrawals from the consumer's
account. They say they're collecting funds owed to them. They can make these withdrawals
in a way they can't with a postdated check." Turning to a
payday lender -- online or on the corner -- is almost universally discouraged
by consumer advocates. But the alternatives can seem thin to someone who needs
cash to see them through to the next paycheck. Many banks offer bounced-check
protection plans that consumer advocates often equate with payday lending.
A notable difference, perhaps, is that the consumer is less likely to be able
to overdraw several times and end up owing money they probably can't repay. "The
long-term solutions include getting a good spending plan and building a nest egg
of savings," says Fox. If you can afford to pay $45 every payday to keep a $300
loan from bouncing, then you can afford to save it so you don't need to borrow
in the future. "Pawn shops are cheaper than payday loans. On
rare occasions you can ask your employer for an advance. Negotiate directly with
whomever you owe. Get a second job. Put off purchases until you can pay. None
of these are comfortable. It's appealing to write the check without having money
in your checking account and walk out with cash, but it comes at a high price." In
their survey of Internet payday loan sites, CFA found that loans of $200 to $2,500
were available, but $500 was the most-frequently offered. Finance charges ranged
from $10 per $100 up to $30 per $100 borrowed. The most common rate of $25 per
$100 translates into an annual percentage rate of approximately 650 percent if
the loan is repaid in two weeks. Many states have passed laws
regulating payday and small loan laws. Consumer Federation of America has compiled
important information that consumers should be familiar with before borrowing. | 
