A new study by Pew Charitable Trusts showed that operators of online payday loans promote loans that are designed for long-term debt, charge exorbitant interest rates and threaten their customers.
“Lump-sum loans online typically cost $25 per $100 borrowed per pay period—an approximately 650 percent annual percentage rate,” noted Pew.
The “Fraud and Abuse Online: Harmful Practices in Internet Payday Lending” report comes after the Federal Trade Commission stopped an online payday loan scheme that the government believes “bilked consumers out of tens of millions of dollars by trapping them into loans they never authorised and then using the supposed ‘loans’ as a pretext to take money from their bank accounts.”
Typically, payday loans are small loans provided in advance of a pay cheque. Balloon-payment or lump-sum loans are due in full during the next pay day.
The report, which polled more than 700 borrowers, revealed that one third of the respondents had their loans structured to withdraw fees from their respective bank accounts without reducing the loan’s principal amount. Around 30 per cent of the respondents received threats from loan companies, saying they will inform the borrower’s friends or employers about their delinquent loans. Some were even threatened with arrest, said the report.
Moreover, 39 per cent of the respondents indicated that their financial or personal information was sold to a third party even without their consent, while 32 per cent experienced unauthorised withdrawals related to the online payday loan.
According to Lisa McGreevy, president of the Online Lenders Alliance (OLA), the trade group’s best practices prohibit unauthorised withdrawals, abusive collection practices and most of the other unethical practices mentioned in the Pew Study.
While there are bad companies online, the OLA and its members ensure that their consumers are treated fairly.