According to a CFA survey of one hundred Internet payday loan sites, small loans involving electronic access to consumers' checking accounts pose high risks to consumers who borrow money by transmitting personal financial information via the Internet.
"Internet payday loans cost up to $30 per $100 borrowed and must be repaid or refinanced by the borrower's next payday," said Jean Ann Fox, CFA's director of consumer protection. "If payday is in two weeks, a $500 loan costs $150, and $650 will be electronically withdrawn from the borrower's checking account."
Many surveyed lenders automatically renew loans by electronically withdrawing the finance charge from the consumer's checking account every payday. If consumers fail to have enough money on deposit to cover the finance charge or repayment, both the payday lender and the bank will impose insufficient funds fees.
Online payday loans are marketed through e-mail, online search, paid ads, and referrals. Typically, a consumer fills out an online application form or faxes a completed application that requests personal information, bank account numbers, Social Security Numbers and employer information. Borrowers fax copies of a check, a recent bank statement, and signed paperwork. The loan is direct deposited into the consumer's checking account and loan payment or the finance charge is electronically withdrawn on the borrower's next payday.
"Internet payday loans are dangerous for cash-strapped consumers," stated Ms. Fox. "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."
CFA's survey of 100 Internet payday loan sites showed that loans from $200 to $2,500 were available, with $500 the most frequently offered. Finance charges ranged from $10 per $100 up to $30 per $100 borrowed. The most frequent rate was $25 per $100, or 650% annual interest rate (APR) if the loan is repaid in two weeks. Typically loans are due on the borrower's next payday which can be a shorter term.
Only 38 sites disclosed the annual interest rates for loans prior to customers completing the application process, while 57 sites quoted the finance charge. The most frequently posted APR was 652%, followed by 780%.
Although loans are due on the borrower's next payday, many surveyed sites automatically renew the loan, withdrawing the finance charge from the borrower's bank account and extending the loan for another pay cycle. Sixty-five of the surveyed sites permit loan renewals with no reduction in principal. At some lenders, consumers have to take additional steps to actually repay the loan. After several renewals, some lenders require borrowers to reduce the loan principal with each renewal.
Contracts from Internet payday lenders include a range of one-sided terms, such as mandatory arbitration clauses, agreements not to participate in class action lawsuits, and agreements not to file for bankruptcy. Some lenders require applicants to agree to keep their bank accounts open until loans are repaid. Others ask for "voluntary" wage assignments even in states where wage assignments are not legal.
CFA advises consumers not to borrow money based on giving a post-dated paper check or electronic access to a bank account as security. Payday loans are too expensive and too hard to repay on the next payday. CFA advises consumers never to transmit bank account numbers, Social Security numbers or other personal financial information via the Internet or by fax to unknown companies. Consumers should shop for lower cost credit, comparing both the dollar finance charge and the APR to get the lowest cost credit available. For help with financial problems, CFA urges consumers to seek credit counseling help or legal assistance.