“I figured it was my mess I got into, and my mess to get out of, ” says Cynthia, who asked that her last name be withheld to protect her family’s privacy. “It was a constant weight on my shoulders, a constant stress. I didn’t sleep much.”
The problem she faced – triple-digit annual interest rates on short-term debts – is what drives many payday loan recipients into bankruptcy. To obtain these loans, borrowers typically give the lender direct access to their checking accounts. Payday loans made by web-based operations are even more expensive than those offered through storefronts, according to a survey from the Pew Charitable Trusts.
A third of online lenders structure loans so they get automatically renewed, without reducing the debt, Washington-based Pew says. That makes it easier to collect interest and renewal fees rather than any of the principal. Almost half of online borrowers said payday lenders took so much money from their checking accounts that they faced additional overdraft costs. The Pew study showed the typical annual percentage rate (APR) charged by online sites was 650%.
Pay cuts, foreclosure
Cynthia had taken two pay cuts to keep her job managing a small import company in Dallas. She and her husband had already lost their house to foreclosure in 2009 and had sought bankruptcy court protection from creditors. When they got a large bill for electricity in 2012, they didn’t have enough money on hand to pay it. Cynthia didn’t qualify for a bank loan and couldn’t borrow money from family or friends. So she turned to a Web-based payday lender.
“It was relatively anonymous, ” she says, referring to the application process. “I didn’t have to go stand in front of a room of people and say I needed money and how much.” She got the money within hours.
After repeating that process several times with other lenders, she had borrowed around $2, 000. The amount she paid wound up in the neighborhood of $10, 000.
“A payday loan is a payday loan, whether it’s made on the Internet or a storefront, ” says Diane Standaert, director of state policy at the Center for Responsible Lending, a Durham, North Carolina-based organization that advocates for a nationwide cap on consumer loans of 36% APR. She says payday loans are structured so that consumers fall into a cycle of debt. Most borrowers must roll over these loans at least once, according to U.S. Consumer Financial Protection Bureau data. Often, loans are renewed as many as 10 times.
To avoid this cycle, potential borrowers may find cheaper alternatives by getting small-dollar loans from credit unions or local banks, by borrowing from friends and family or by accepting help from local charities. For Cynthia, payday loans quickly became overwhelming.
After taking on more debt to catch up on payments for earlier payday loans, Cynthia was over her head just trying to pay almost $1, 656 in monthly interest she owed on four such debts – an amount that topped what she got in each paycheck. She wound up paying nearly the same amount she had initially borrowed without chipping away at the principal at all. And she didn’t have enough money to make ends meet.
The calls started coming – three or four per company each day. “They’d say things like, `We’ll freeze your bank account.’ `This is fraud, we can file a lawsuit.’ `We’ll report this to the credit bureaus, ’” she says.
Almost a third – 30% – of borrowers from online payday lenders have been similarly threatened, according to Pew, Such actions are banned by the federal Fair Debt Collection Practices Act. In July, the consumer bureau fined ACE Cash Express of Irving, Texas, citing harassment and threats made by debt collectors. ACE, which paid $10 million in fines and refunds, didn’t admit wrongdoing. One of the nation’s biggest payday lenders, ACE was among those that Cynthia had borrowed from.
Still, few payday lenders are taken to task for questionable practices. Sometimes it’s more difficult to prosecute online operations that aren’t located in the U.S.
Offshore companies often don’t list a headquarters location, making it impossible to send them legal notice that a debtor has hired a lawyer and should not be contacted directly again, says Christopher Dziak, a bankruptcy attorney in Albuquerque, New Mexico. He has clients who’ve struggled with payday lenders. He adds that in his experience, they employ more aggressive collection tactics.
“There’s nothing I can do economically to stop them, ” he says – suing in a foreign court would be too expensive. Just paying off the debt would cost much less.
Not all online payday lenders use abusive tactics. An industry trade group called the Community Financial Services Association of America requires members provide full pricing disclosures on their websites. They’re also required to offer extended payment plans at no additional cost for those who can’t repay a loan when it comes due, and no more than four rollovers are allowed. Those steps can help prevent things from getting out of control. But as of 2014, none of the lenders Cynthia used were members.
Some online sites that look like payday lenders don’t actually make loans. Instead, they generate leads by gleaning personal information from credit applications and distributing it to actual lenders, who then call the would-be borrower. A National Public Radio Planet Money segment last year showed how a single loan application through a lead generator resulted in dozens of calls from lenders. It said these matching services for people in need of cash and outfits willing to lend get as much as $100 per lead.
“If you’re going to give your information to some of those fly-by-night companies, there’s no telling what they’ll do with it, ” Dziak says. Sometimes, the damage caused by online payday lenders is much more devastating than that caused by storefront operations offering similar short-term loans, which may be regulated at the state or local level. Online organizations may not abide by such rules.
Funding Circle is an online portal which allows savers to lend money directly to small businesses. The portal is the first site to use the process of peer-to-peer lending for business funding in the UK. As of 10 October 2011, Funding Circle has facilitated £23.5 million in loans to small and medium sized firms.
Funding Circle is based in the...
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