Traditional payday loans are criticized as being extremely expensive, creating a debt trap and fostering coercive collection tactics due to high finance charges, one pay-cycle repayment terms, and check-holding by the lender. These problems, plus new ones, apply to payday loans based on debit-holding and made via the Internet.
Factors That Create A Debt Trap
Internet payday loans become a debt trap as a result of the extremely high cost of loans, the relatively large amount of money that must be repaid on the next payday, and the coercive use of authorization to debit the borrower’s bank account to repay loans. It is extremely easy to get into debt to one or more Internet payday lender, but very difficult to get out of debt.
Critics of payday lending hold that the industry business is built on loan rollovers, where borrowers pay the finance charge to extend the loan without paying down principal. One Internet lender acknowledges that the high profits in payday lending (claimed as a 54.65% profit margin) are due, in large part, to rollovers. FastBucks.com claims that 80% of its customers come back before payday, pay the fee and rollover the original loan, now owing the fee again on the same loan.
Lenders permit consumers to borrow a high proportion of take home pay without determining ability to repay. For example, Paydayloans.com permits new customers to borrow up to 50% of net income per pay period. After establishing a good repayment history, the site will permit loans up to 75% of net income per pay period.
Borrowing online in the privacy of a consumer’s home may also make it easier to become overextended. As one site puts it, “Avoid the hassle and embarrassment of having to go to a local check cashing or cash advance center. Apply for your payroll loan in the privacy of your own home!” Another site says “If you go to a walk-in payday lender, someone you know might see you…Imagine not having to walk into a payday loan center and stand in line, with everyone staring at you…”
Extreme High Cost of Loans
The finance charge per $100 for a full two-week pay cycle results in triple-digit interest rates. Loans made for less time at the same finance charge carry astronomical APRs. From consumer’s Internet payday loan contracts on file with the author, these examples illustrate the extreme high cost of payday loans:
United Consumer Financial Services, Inc., located in Utah, charged an Ohio• consumer 829.54% APR for a $200 loan which could be rolled over for 12 weeks.
Apple Fast Cash Personal Loans, from Wilmington, DE charged $54.86 for a $400 loan for eight days and quoted a 625.71% APR.
Inajin Enterprises dba Axcess Cash quoted a 1,095% APR for a $300 loan and $90 finance charge due in eleven days. The $30 NSF fee was extra.
CashForce USA, Inc. of Keane, NH contracted to loan $400 at a cost of $75 and a 651.78% APR. The contract stated “Your Automated Clearing House (ACH) authorization for Pre-Authorized Electronic Funds Transfer (EFT) Payments is security for this loan.”
Overextended with Multiple Concurrent Loans
Mr. X has used Internet payday loans for a year and a half. A first loan of $325 has ballooned into six loans that would cost $4,000 to pay in full. He pays $600 -$700 a month in rollover fees, which puts him behind on utilities, rent, and other expenses. Due to prior bankruptcy, maxed out credit cards, and exhaustion of advances from his retirement plan, Mr. X is experiencing great stress and few options. He fears harassment if he withdraws authorization for the lender to withdraw finance charges or closes his account.
Another consumer contacted the Center for Responsible Lending in North Carolina to report a series of Internet payday loans which he could not repay. He had borrowed $1,675 from six online payday loan companies and owed $2,154.75. The APRs for these loans ranged from 497% to 1,564% at two web sites. Three lenders claimed to be Delaware lenders, while another claimed to be from Idaho.
Automatic Renewals
A consumer reported that CashNet charged her bank account a $60 fee every week. She eventually paid $600 to borrow $200 for what was intended to be two weeks after overlooking an asterisk in the contract instructing her to sign a fourth page if she did not want to refinance the loan. Because she didn’t sign, the company automatically refinanced. According to the Application Supplement on page 4 of 8 from the CashNet 500 web site, a consumer has to sign and fax to the company a separate section and call the lender to decline the refinance option.
On the same page that CashNet500 makes perpetual refinancing so likely, in bold print it warns “Short Term loans provide the cash needed to meet immediate short-term cash flow problems. They are not a solution for longer term financial problems for which other kinds of financing may be more appropriate. You may want to discuss your financial situation with a nonprofit financial counseling service.”
Inajin Enterprises d/b/a/ Instant Cash USA also sets the default option for repayment at automatic renewal. If consumers do not call ahead of time, the lender will deduct the finance charge only. Mypaydayloan.com tells consumers it is “easier to simply make a minimum payment and extend the loan for another two weeks” instead of repaying the loan in full and waiting four to five days after making the payment before being allowed to apply for a renewal…”there is no waiting period for keeping your current funds and extending the loan.”
Under the renewal plans of some Internet lenders, a consumer borrowing $100 at a $30 per $100 finance charge will pay $150 for one loan and four renewals (5/$30). If the principal is then repaid in $50 increments at the same rate, the consumer pays an additional $15 finance charge for the $50 principal due at the second pay-down renewal for a total cost of borrowing $100 at $165 over a 14 week period.
