The payday lending industry is booming, and the Internet is contributing to its dramatic growth. What attracts many online borrowers 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.
Unlike a storefront payday loan, which normally requires a postdated check, an online loan application asks for all the personal information anyone would ever need to steal your identity. An online loan also requires that you give permission for the lender to access your checking account to deposit the loan and to withdraw fees and interest. Since it is in the lender’s interest for borrowers to “flip” their loans as many times as possible, many lenders make it difficult for customers to pay off the loan and just keep dipping into their checking accounts to collect renewal charges.
Perhaps the biggest danger of any payday loan is the “debt-spiral” it triggers. According to the Consumer Federation of America and the Center for Responsible Lending, payday loans aren’t the quick, one-time fix that lenders label them. In fact, 99% of payday loans go to repeat borrowers. At an annual interest rate of approximately 650 (accurate if you are talking about internet loans; would use 400% if you mean all payday loans)%, with most borrowers renewing their loans over and over again, many consumers end up paying thousands in interest and fees to keep a small loan of a few hundred dollars from becoming delinquent.
Consumer advocates agree that payday loans are among the very worst options for borrowers, and insist that even many consumers with a blemished credit history have alternatives.
To figure out what those options might be, contact a reputable nonprofit consumer credit counseling service (http://www.nfcc.org). In a typical session, a counselor will review your income, monthly expenses, and debt. Based on the numbers and other factors, the counselor will outline your options, which might include using other types of financing, reducing living expenses, increasing income, making special payment arrangements with creditors, or seeking legal advice.
The best way to avoid needing a payday loan is to save an emergency fund now, before you find yourself in a financial bind. Set up an automatic transfer of $50 each payday from your My CU checking/share draft account to your savings account and you won’t even miss the money. Do it today, and the money will be there for you when you need it.
If you’ve already taken out a payday loan and think you may be a victim of predatory lending practices or fraud, visit the Center for Responsible Lending Web site, which offers a tool to search for information about consumer protection laws and contacts in your state (http://www.responsiblelending.org).
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