With names like The Fast Cash Wizard and AmazingPaydayLoans, it would appear that online payday lenders are able to perform financial miracles for anyone short of cash between paychecks. While these virtual cash machines may get you out of a bind for the moment, this quick fix may be the start of a steady decline into suffocating debt.
Add to that the loss of control over your checking account and the potential to become a victim of identity theft, and an online payday loan becomes more mishap than miracle.
Payday loans, so called because typical loan terms require borrowers to repay the principal on their next payday, first became available through storefront lenders providing fast funds to borrowers with a job and a checking account but not the means to deal with a financial shortfall. Payday, or cash advance, loans feature a relatively low principal balance ($500 is a common loan amount), a very short repayment term, the lack of an installment payment plan, and very high interest rates.
Just as other businesses have flocked to the Internet to expand their reach, so have payday lenders. An Internet search for the keywords "payday loans" brings up millions of results, a mix that includes links to lenders, lead generators (marketing services that connect borrowers and lenders), and consumer protection organizations and articles.
What attracts many online borrowers--besides the offer of quick cash--is a loan process that entails just a few keystrokes, perhaps a fax, and no need to look someone in the eye and admit they're broke. In exchange for that convenience and anonymity, however, online borrowers must take risks that storefront borrowers don't.
While all payday loans have certain features, such as loan shark-high interest rates, in common, loans arranged online are even more troublesome than those applied for in-person. That's because unlike a storefront payday loan, which normally requires a postdated check, an online loan application asks for such things as your Social Security number, driver's license number, mother's maiden name, employment information, checking account number, a voided check, a photo ID, a pay stub, or a bank statement--all the personal information anyone would need to steal your identity.
And depending on which lender you choose, you could be broadcasting your personal information for all of cyberspace to see. According to results of a survey of 100 payday loan Web sites released by the Consumer Federation of America (CFA) in November 2004, 28 of the 100 sites failed to have secure connections on application pages that collect personal financial information.
If that weren't risky enough, an online loan requires that you give permission for the lender to access your checking account to deposit the loan and to withdraw fees and interest. That access gives the lender enough freedom to automatically roll your loan over at the end of the term and withdraw another finance charge. And if you don't have enough money in your account to cover that charge or full loan repayment, you could get hit with nonsufficient funds fees from both the lender and your credit union or bank.
Since it's in the lender's interest for borrowers to "flip," or renew, their loans as many times as possible, many lenders make it difficult for customers to pay off the loan. Susan Lupton is a senior policy associate with the Center for Responsible Lending (CRL), a nonprofit organization based in Durham, N.C., that works to eliminate abusive financial practices. Lupton tells of an example where one lender requires borrowers who want to repay their loan to contact the company between 10 a.m. and 11 a.m. at least three days before the loan comes due. Miss that window--or get a busy signal--and you're stuck in the loan for another pay period.
Many online lenders also make it difficult for borrowers--and consumer protection agencies--to track them down, making paying off the loan or resolving a problem that much more difficult. The CFA survey found that less than half of the surveyed lenders provided a physical address or a phone number; almost a quarter of them listed no contact information of any kind; and some sites are registered through anonymous domain registries. After clicking through a few pages or being redirected from one site to another, it even can be difficult to identify who the actual lender is.
As Todd Mark, spokesperson for Consumer Credit Counseling Service of Greater Atlanta, warns, "It's just plain and simple a bad idea to give a payday lender access to your account."
No matter where you get your payday loan, in person or online, you're going to pay a high price for it. The CFA study found finance charges on Internet payday loans ranged from $10 to $30 per $100 borrowed. The most common rate of $25 per $100 translates into an annual percentage rate of approximately 650%. The CRL found that the average payday borrower pays $800 to borrow $325, though many borrowers end up paying thousands in interest and fees to keep a small loan from becoming delinquent.
That's because a typical customer won't repay the principal when the first loan term is up. In fact, 99% of payday loans go to repeat borrowers. In an August 2004 statement from Advance America, Spartanburg, S.C., the nation's largest payday lender, the company said the average number of loans to its borrowers is nine per year.
"Most people we talk to have been in payday loans for months, or even years," says CRL's Lupton.
The CRL, on its Web site, highlights the details of a few such typical borrowers, including one 69-year-old warehouse worker who renewed his Advance America loan every payday for more than five years, ultimately paying more than $5,000 in interest on a $300 loan.
"Most payday borrowers we work with have fallen into a debt spiral," says Mark, whose organization counsels people every day who are in worse shape because they took out one or more payday loans. "They're not borrowing for two weeks; they renew and renew."
When asked why they turned to a payday lender for money, borrowers typically say they lacked other options. Consumer advocates disagree.
Lupton and fellow consumer advocates advise anyone considering a payday loan to contact a reputable nonprofit consumer credit counseling service to explore every possible option, including ones that never may have occurred to you. Someone at your credit union may be able to counsel you, or to refer you to a local credit counselor.
In a typical session, a credit counselor will review your income, monthly expenses, and debt. Based on the numbers and other factors, you may look at the possibility of using a credit card or other financing, rather than a payday loan, to get through a rough period.
Or a counselor might discuss contacting one or more of your creditors to work out a payment plan that will allow you to avoid a payday loan. Mark says that one of the biggest mistakes consumers make is not contacting their creditors when they can see they're going to have trouble making their full bill payments on time.
The counselor also may discuss ways to increase income by earning more or selling or refinancing certain assets. If your situation warrants, you may be given a referral to legal assistance. A lawyer or legal aid service can explore other alternatives and tell you what your rights are.
These options may not be pleasant initially, but they will be genuine solutions. And you will learn ways to avoid getting back into trouble in the future.
Mark has pointed advice for credit union members who find themselves short between paychecks: "If you're even contemplating a payday loan, go and speak to [the people at] your credit union."
More than ever, credit unions are working to offer their members options that will protect them from the risks and costs of payday loans. For example, many credit unions have designed a loan product similar to a payday loan--without the exorbitant interest rate. Mark urges members to take advantage of the programs their credit union makes available.
And what if you can't find another way to get the money you need before next payday?
"Even if you really don't have any other options for getting money, a payday loan won't be the solution to your money troubles," says Lupton.