State Moves To Stamp-Out Internet Payday Lending During National Consumer Protection Week
Exorbitant, Illegal Fees and Threat of Identity Theft is Borrowing Trouble
"These loans carry exorbitant fees and interest rates and can quickly lead consumers into escalating debt," said Consumer Affairs Director Beth Lindstrom. "Equally dangerous is the huge risk of identity theft as these websites typically provide very little identifying information, but require direct access to bank accounts via cyberspace. There are far safer and less costly ways to deal with short-term cash flow problems," emphasized Lindstrom.
Commissioner of Banks Steven L. Antonakes noted, "None of these companies are licensed to offer loans to Massachusetts consumers. All of them charge interest rates far in excess of what our small loan law allows. Today we are ordering them to cease issuing payday loans in the Commonwealth." The Division of Banks also contacted several local companies requesting that they no longer accept print or online advertisements from out-of-state payday lenders.
Payday loans are short term, small sum, high rate, unsecured personal loans that use consumer checking accounts (either post-dated checks or electronic access) to secure repayment of the amount borrowed. Repayment of the full amount and lender fees is typically due within 14 days or with the borrower's next paycheck. Partial payments are rarely allowed so if a borrower can't repay the full amount within the required timeframe, the loan is usually rolled over for additional periods of time and additional fees.
The Debt Trap
Several publicized studies have found that most payday borrowers do not payoff loans with their next paycheck. Here's a typical scenario of the adverse financial impact on payday loan users. A consumer borrows $300 from a payday lender that charges a $25 fee for every $100 borrowed. Payday comes and the borrower cannot repay the initial loan so the $75 fee is electronically withdrawn from the borrower's checking account. The loan is rolled over for another two weeks for an additional $75 fee. If this occurs over three additional pay periods, a consumer will have paid $450 in fees for a $300 loan that remains unpaid.
"Most of these operations are geared toward flipping the loans and generating tremendous profit from outrageous fees," said Jean Ann Fox, Consumer Protection Director for the Consumer Federation of America. "They make it difficult for borrowers to pay off the loans through prior notification requirements and too often their customers are in no financial position to re-pay the debt."
Although payday lending is not specifically prohibited in Massachusetts, there are currently no payday lenders licensed or located here. This is likely due to the requirement under the state's small loan law that caps annual interest rates on these loans at 23% and limits fees to $20. The entities reviewed by the Division of Banks were found to be charging annual percentage rates averaging 300 percent and fees averaging $30.
Director Lindstrom urges consumers to steer clear of payday loans and explore less costly and risky alternatives to get through a cash crunch. They include:
- Obtain a cash advance on a credit card or check to see if your bank or credit union provides short-term loans. While there are still costs associated with these alternatives they are typically much less than what is charged for a payday loan.
- Ask to borrow money from a friend or relative.
- Check with your employer to see whether an advance on your paycheck can be arranged.
- Find out if you can delay paying a non-interest bill and make payment arrangements with your service providers, such as phone and utility companies.
- Ask your creditor for more time to pay your bills and what the late charge, additional finance charge or higher interest rate will be. All of these options are less costly than the fees and interest rates of payday lenders.
- Contact an accredited consumer credit counseling agency in your area. Counselors can advice consumers how to get out of debt and avoid the predatory loans.
Consumers with additional questions regarding payday lending should contact the Division of Banks' Consumer Hotline at 1-800-495-BANK (2265), extension 501 or the Consumer Affairs Hotline at 1-888-283-3757 or by email at firstname.lastname@example.org.