A New Trend: Online Payday Loans

Short-term loans are now available over the Internet and through mobile telephone text messaging. Known as the high-tech version of payday loans, customers are approved, registered, and given a Personal Identification Number (PIN),

which is used either on a website or in a mobile phone’s text message to borrow money that is then transferred into the borrower’s bank account within minutes.

In the U.S., Wells Fargo offers a “Direct Deposit Advance” that works with a text message and comes with a 120 percent APR. Txtloan in the UK sports a 414 percent interest rate, which equals a whopping 4,474 percent APR.

The APR with online payday loans is usually higher than payday loans from “brick and mortar” payday loan establishments. A $100 payday loan made online usually costs an additional $30. That equals a 650 percent APR. So, when a customer receives a $500 online payroll loan, the bill due the next payday is $500 plus a $150 finance charge for a total of $650. If that amount is electronically removed from an already deficient checking account, both the lender and the bank then slap on penalty fees for insufficient funds.

A survey of 100 Internet payday loan websites by the credit counseling organization, Consumer Federation of America (CFA), found that loans are available from $200 to $2,500 and that $500 was the amount most loaned out by Internet payday loaners. Automatic rollovers, whereby additional finance fees are added on each payday without the requirement that the principal of the loan be reduced, were allowed on 65 percent of the online payday websites, according to the CFA survey.

The CFA found Internet payday loan contracts that involve terms which harm the borrower, such as mandatory arbitration clauses, agreements whereby the borrower will not participate in class action lawsuits, and agreements made by the borrower not to file for bankruptcy. Some Internet payday loan agreements require borrowers to keep their bank account open until all loans with them are repaid. Voluntary wage assignments are required by some Internet payday loan websites, even in localities where wage assignments are illegal.

Customers who get payday loans online risk opening themselves up to identity theft.

A general policy is to refrain from giving bank account numbers, Social Security numbers, or any personal financial information over the Internet. Plus, official complaints are harder to pinpoint on an individual, since online payday lenders are harder to track down, compared to the “brick and mortar” payday “stores.” A CFA survey found that less than half of the surveyed online payday lenders provided a physical address or telephone number and that almost a quarter of them showed absolutely no contact information of any kind. Some online payday companies even register their domain names through anonymous registries.

Susan Lupton, senior policy associate for the Center for Responsible Lending, a non-profit organization in Durham, North Carolina, tells of one online payday lender that 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 becomes due.

If a borrower misses that small window of opportunity, or calls and always gets a busy signal, they are stuck with paying another finance fee for an additional pay period.

“It’s just plain and simply a bad idea to give a payday lender access to your account,” said Todd Mark, from the Consumer Credit Counseling Service of Greater Atlanta.

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