If you need a short-term loan, you may be tempted by advertisements for online payday lenders. But before you click on an electronic link, the Federal Trade Commission (FTC), the nation’s consumer protection agency, has a few words of caution to say about it.
Lenders don’t always follow the rules.
Recently, the FTC sued several Internet payday providers for violating federal law. The FTC alleges that lenders lied about the cost of their loans, asked borrowers to allow them to withdraw money from their bank accounts automatically, and threatened borrowers with lawsuits or arrest for nonpayment.
Let’s see how this scam is alleged to have developed: Payday loan lenders operating on the Internet asked borrowers to provide information about their respective bank accounts to electronically deposit the borrowed funds and later withdraw from the performance—the repayment amount. The lenders stated that the repayment amount would be equal to the amount borrowed plus the amount of a one-time finance charge and that this amount would be withdrawn on a particular date. Instead, lenders made multiple withdrawals from borrowers’ bank accounts and imposed a new finance charge each time. The result of this ruse? Borrowers ended up paying far more than the stated cost for their loans.
A typical example illustrates this scheme: A person borrowed $300 with a one-time finance charge set at $90. The borrower assumed that he would repay the loan in a single withdrawal of $390. But the lender began making a series of automatic withdrawals, imposing a $90 finance charge each time. At the time of the last departure, to repay the loan, the borrower would have paid $975 instead of $390.
In addition to the alleged misrepresentation regarding the loan terms, the lenders also acted as unscrupulous debt collectors who falsely threatened borrowers with lawsuits or arrests.
Risks of sharing your personal information
Be careful when you share your personal information. Whether or not your visit to a payday lender’s online site results in a loan, simply entering your information on the site can lead to a problem. The sale of personal and financial information is big business. People who buy your information may use it to sell you products and services, charge you for products and services you did not purchase or charge amounts other than those you authorized, or attempt to steal your identity.
Even if you do not click the “submit” button to complete the transaction, your information may be captured through keystroke logging – a program that allows you to view and record everything you enter in the app.
Unlike a direct lender who lends you money, a loan aggregator is a broker – a company that collects your personal and financial information on a loan application and searches for lenders who can offer you a loan.
Loan aggregators also called lead generators, can – and do – sell the information on loan applications, and potential borrowers may not even know it. The app may ask for your name, address, phone number, date of birth, Social Security number, bank account or credit card number, annual income, and more.
How to search for a loan
Payday loans can be expensive; other credit offers may have lower rates and costs. Before you decide to take out an online payday loan, it’s essential to shop around and compare the available options. When comparing credit offers, check the credit providers’ reputations online or by consulting other sources.
- Look for the credit offer that has the lowest cost. Before selecting a credit offer, try to determine the effective annual rate and the finance charge (which, among other expenses, includes the payments and interest for the loan) of the different options. You have to look for the lowest effective annual rate. If you’re searching online and can’t find the effective annual rate and finance charge, visit lenders in person.
- Consider taking out a small loan from a credit union. Some banks may offer short-term loans for small amounts at competitive rates. Similarly, a local community organization may provide small business payday lenders loans. Another possibility could be to take an advance of money on a credit card, but this option may have a higher interest rate than other sources of cash: before deciding, find out the terms.
- If you’re having trouble making your payments, contact your creditors or payday lenders servicer as soon as possible and ask for more time. If you act in good faith, several creditors or lenders may be willing to find a solution. They may offer to extend the deadline for paying your bills: Find out how much they will charge you for that service. You may be charged a late payment fee, an additional finance charge, or a higher interest rate.
- Make a realistic budget, including your daily and monthly expenses, and plan, plan, and plan. Try to avoid unnecessary purchases: everything adds up, even the cost of things as insignificant as that cup of coffee that you buy every day. At the same time, try to accumulate some savings: depositing little by little helps a lot. Having a savings plan – even a modest one – can help you avoid having to borrow money for an emergency. For example, saving the cost of a $300 payday loan for six months can help you weave a safety net to cushion the blow of a money emergency.
- Find out if you have – or if your bank would offer – overdraft protection on your checking account. Suppose you’re regularly using most or all of the funds in your account, and you make a mistake when posting your account transactions. In that case, overdraft protection can help protect you from additional credit problems. Find out the terms of the overdraft protection available to you – how much it costs and what it covers. Some banks offer protection against the denial of operations for insufficient funds that can be used to protect individual overdrafts or overdrafts caused by writing checks or electronic withdrawals. Still, generally, they will apply a fee. This option can be expensive.