Dangers of applying for an online payday loan
As consumers move their financial activities online, applying online for a payday loan may seem like the natural thing for a cash-strapped person to do.
But you could be setting yourself up for a world of hurt, from paying exorbitant interest rates to having funds swiped from your bank account to being threatened by debt collectors. Just filling out an application could be enough to begin the harassment and thievery.
"Absolutely the worst thing you can do is apply for an online payday loan," says Jay Speer, executive director of the Virginia Poverty Law Center.
Most online payday loan sites aren't even operated by lenders. They're run by "lead generators," who seek your personal information, such as Social Security number, driver's license number and bank account details. They then sell that information to lenders.
"Your email and telephone explode after that," Speer says, as lenders vie to offer you cash. That can happen even if you live in one of the 15 states where payday loans are illegal.
Lenders aren't the only ones in the market for your personal information. "There's a good chance they sell to fraudsters -- people who come after you months or years later," he says.
Sandra Green (not her real name) has experienced this firsthand. The Virginia woman turned to online payday loans after her husband was injured and couldn't work for two years. Their credit was damaged and they couldn't get cash to pay their bills from traditional financial institutions.
Green took out several loans totaling $3,000 to $4,000 starting around 2010. The lenders that she received cash from took their payments from her bank account -- but they weren't the only ones. A company she had never heard of swiped money from her account, creating an overdraft.
She filled out a request for the bank to stop payment. That worked for about six months, and then the withdrawals started again. "People will change the identity of the company and then they'll hit it (the account) again. Once they do this it's a never-ending cycle," she says.
Companies she'd never done business with would call her at work and at home, harassing her. One threatened to file papers with the local sheriff's office if she didn't pay immediately.
"They get really belligerent when you don't do what they want you to do," Green recalls.
She feared she'd wind up in bankruptcy because of the loans and finally sought help from Blue Ridge Legal Services, a Virginia legal aid society, in 2013. Blue Ridge connected her with the Virginia Poverty Law Center.
Speer says of online payday lenders: "These people are like sharks. If you give them some money it's like throwing blood in the water."
These people are like sharks. If you give them some money it's like throwing blood in the water.
|-- Online payday loan customer|
Payday loans are generally described as small, short-term loans. A consumer writes a check for the amount borrowed, plus a fee. The lender advances money against the check and the check is held until the next payday, when the loan and fees must be paid. Or, in the practice used by most online lenders, a consumer can grant the lender access to his bank account, and the lender electronically accesses the account to deposit money and withdraw payment.
Even paying back legitimate loans carries astronomical costs. Green took out a loan of $350. It took six weeks for her to pay it back, and she paid nearly $300 in fees.
Online payday loans boom
Her experiences are not uncommon. "Fraud and Abuse Online: Harmful Practices in Internet Payday Lending," a 2014 study by the Pew Charitable Trusts, found online installment payday loans typically have an APR of 300 percent to more than 700 percent. Online lump-sum payday loans have a typical APR of 650 percent, or $25 per $100 borrowed per pay period. Exorbitant fees are also charged, and initial payments might not be applied to the loan's principal.
Online payday lending is big business. Revenue tripled from $1.4 billion in 2006 to $4.1 billion, according to Pew.
Of the more than 250 online payday borrowers surveyed by Pew, almost 40 percent said their personal information was sold to a third party without their knowledge. Nearly one-third had an unauthorized withdrawal from their account.
Threats were common, with 30 percent of those surveyed saying they were threatened by an online lender or debt collector.
"Harassment and fraud are really concentrated in the online lending market," says Nick Bourke, project director for Pew's study on payday loans.
Part of the problem stems from the fact that there's no control over who can get your information once you apply for an online payday loan. "People's personal information can be spread far and wide," Bourke says.
Even if the loans are fraudulent, a consumer's failure to pay them may be reported to one of the three main credit bureaus, Speer says, which can impact a consumer's ability to rent an apartment or land a job.
Many storefront payday lenders are fed up with the behavior of these online payday lenders.
"These unlawful lenders roam the Internet trolling for customers. They are scammers. They are fraudsters," says Amy Cantu, spokeswoman for the Community Financial Services Association of America, which represents more than half of the country's storefront payday lenders.
Though online payday lenders represent just one-third of the marketplace, 90 percent of payday lending complaints filed with the Better Business Bureau are aimed at them, according to Pew.
Association members vow to adhere to the organization's best practices, which include complying with state and federal laws, being licensed in each state in which they do business and adhering to acceptable debt collection practices.
Some of the association's larger members also have an online presence, she says, but those sites also adhere to the organization's best practices.Cantu says she understands that consumers with financial troubles may prefer the anonymity of the Internet when seeking cash, rather than walking into a storefront payday lender. But online lenders are supposed to only operate in the states that allow payday lending.
Her organization wants the federal consumer watchdog agency, the Consumer Financial Protection Bureau, to crack down on illegal lenders.
Agencies crack down
Already the CFPB and the Federal Trade Commission are stepping up action against fraudsters. In a joint news conference in September, the agencies announced they'd filed suit against two online payday lenders.
These unlawful lenders roam the Internet trolling for customers. They are scammers. They are fraudsters
|-- Amy Cantu,
Community Financial Services Association of America
The CFPB received more than 1,300 consumer complaints about the Hydra Group.
At the news conference, CFBP Director Richard Cordray accused the Hydra Group of "running an illegal cash-grab scam to force purported loans on people without their prior consent. It is an incredibly brazen and deceptive scheme."
Both the Hydra Group and CWB Services were accused of buying personal information, including bank account numbers, from lead generators. The companies would deposit money into consumers' bank accounts without any signed agreements, and then make unauthorized withdrawals from the accounts. If a consumer complained, the companies would produce false loan documents.
In 15 months, the Hydra Group made $97.3 million in loans and collected $115.4 million from consumers.
Even if consumers closed their accounts, their information might have been sold to debt collectors, who then attempted to collect more money.
A federal judge temporarily shut down the Hydra Group, freezing its assets. The CFPB is requesting a permanent shutdown, along with penalties imposed upon the company and refunds made to consumers.
With CWB Services, the federal court froze the company's assets and appointed a receivership and the FTC is requesting consumers' money be refunded. The company had raked in $46 million in 11 months, said Jessica Rich, the FTC's director of the Bureau of Consumer Protection.
Bourke says the CFPB should ensure that small loans are tailored to the borrower's ability to pay them off and should provide more protection to consumers, particularly against illegal debt collection practices.
"The core of the problem is that payday loans don't help people. They drive people further into debt and distress," he says.See related: Know your credit card fraudster, Know your rights under the Truth in Lending Act, New protections from financial 'gotchas' in 2015
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