This will probably get me in trouble judging by some of the posts/advertisements that I see in Google + but I felt compelled to say something.
Short term loans like payday or Internet loans are absolutely ruinous. They come with ridiculously high fees and the interest rates, when annualized, are typically over 200% and sometimes run over 1000%. (Was listening to Marketplace Weekend once and they said the industry racks in more than $8,000,000 in fees per year). Pretty much every state has laws that cap the amount of interest that can be charged on a loan, which are known as usury laws, but typically the payday lenders will find a way around the laws. (15 states have banned payday loans outright). The payday loan industry lobbies are very strong and will typically be able to block entirely or at least water down any proposed regulations and/or laws passed designed to regulate them.
In addition, they have clever lawyers who find a way for them to reincorporate and open with a new name and corporate structure the day after they are forced to shut down or change some aspect of their business model slightly so they are in compliance with the law. (And yes, I am a lawyer and am throwing my profession under the bus. Everyone else does it, so why not me as well?).
A lot of the lenders have even reincorporated offshore to avoid regulators.
Some examples. For instance, there are laws, like the Military Lending Act, that regulate what interest rates a military service member can be charged (36%), but there are a number of loopholes that the industry constantly uses to continue to exploit our mean and women in uniform. For example, a number of loans are not covered under the interest rate cap, including loans for more that $2,000 or loans that last more than 91 days. The short-term loans not covered under the law’s interest rate cap of 36 percent include loans for more than $2,000 or with a term of more than 91 days. So guess what products the industry pushes? You've got it, the ones exempt from the law.
The New York Times has done a number of articles on this, including this one.
In addition, a number of banks have, depending on your viewpoint, conspired/cooperated with payday lenders. J.P Morgan several years ago settled a class action lawsuits that accused it of making auto drafts of people's bank accounts to repay payday lenders even after the account holder told the bank to stop doing it. The lenders will often require you to give them your bank account information so they can automatically deduct the payments from your account. The thing is, allowing them to do that means they can withdraw the money even if it's not your account-causing you to incur overdraft fees from the bank. Every time they try to ding your account and the money is not there, then the bank makes money in the form of an overdraft fee. So they continue to process the payments, in many cases even though the customers have told them to stop.
Some states, like Virginia, even ban these automatic payments altogether.
Again, the New York Times had done some articles on this as well, including an interesting one available here.
I probably seem like I am getting on a soapbox but I have seen first hand what some of these lenders will do to people through my work volunteering with legal aid clinics that help consumers struggling with financial problems. They can absolutely ruin you.
Please, in the name of all that is holy, don't take out a payday loan or give these people your bank account number. I know sometimes you just need money right away, but there are alternatives.
If you have any questions, feel free to email me here. I'm not trying to drum up legal business for myself here, I just want people to stop being exploited.
In a future post I will discuss what some of your options are if you're in a bind with one of these lenders.
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