Internet payday loans that offer money due by the next pay day can cost up to $30 per $100 borrowed. The consumer, already on shaky financial ground, typically faces annual interest rates (APRs) of 650 percent. which is among the reasons why these loans have been controversial since their inception 20 years ago.
Although major banks like JP Morgan Chase, Bank of America and Wells Fargo do not make payday loans, they have become allies with the off-shore and internet-based payday lenders that do, allowing lenders to tap checking accounts even after customers have begged them to stop the withdrawals.
“Without the assistance of the banks in processing and sending electronic funds, these lenders simply couldn’t operate,” said Josh Zinner, co-director of the Neighborhood Economic Development Advocacy Project.
In response, Virginia O’Neill, senior counsel with the American Bankers Association said, “The industry is not in a position to monitor customer accounts to see where their payments are going.”
The Federal Deposit Insurance Corporation and Consumer Financial Protection Bureau are examining the banks’ role in online loans, a lucrative partnership for the banks because the withdrawals usually set off a cascade of overdraft fees.
In one case, Chase bank charged customer Ivy Brodsky $1,523 in fees, a combination of 44 insufficient fund fees, extended overdraft fees and service fees.
Roughly three million Americans obtained internet payday loans in 2010, and by 2016 internet loans will make up roughly 60 percent of the total payday loans, an increase of 35 percent.
According to John Hecht, an analyst with Stephens Inc, an investment bank, “The volume of online payday loans was $13 billion, up more that 120 percent from $5.8 billion in 2006
Facing increasing pressure from states, many lenders have set up shop offshore. At a 2012 industry conference payday lenders discussed the benefits of offshore lending often based in Belize, Malta, the Isle of Man and the West Indies.
State prosecutors are in constant battle to keep online lenders from illegally making loans to residents.
“The internet knows no borders, and there are layer upon layer of cyber-entities, and some are difficult to trace,” said Arkansas Attorney General Dustin McDaniel .
Dedrick Muhammad, senior director of the NAACP Economic Department, in an article entitled “The Truth About Payday Loans,” gave advice to borrowers who need money but want to avoid the sky-high rates offered by payday loans.
“In today’s economy there are no easy answers for low- to moderate-income Americans struggling to pay the bills, but what will clearly never work is adding another high-cost loan,” he said.
“When faced with a real emergency, don’t discount relying on your friends and family. Many borrowers go to payday lenders to avoid borrowing from family and friends, only to end up asking for assistance later to get out of the debt trap. You may also investigate viable loan options at mainstream banks and financial institutions by assessing their APR and fees.
“And as you continue to trim your day-to-day costs to fit your income, your goal should be to build up a savings cushion for emergencies – that’s money you can loan to yourself, interest free.”
The Consumer Federation of America (CFA) is warning consumers to exercise extreme caution when using Internet payday loan sites.