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Top Five Risks for Online Payday Loans

Tuesday, September 20, 2011 1:24pm
Bomb with the word "Risk" on the front
A study released in 2011 by the Consumer Federation of America took a look at 20 online payday lenders and assessed their best and worst practices. The study found that the electronic nature of these online loans can heighten the risk for increased debt and even fraud. Here is a list of the top five payday loan risks the study illuminated.

  1. Online payday loan lenders require the borrower’s bank account and routing number so that they can access the borrower’s bank account electronically. This means that the amount for the loan can be easily and instantly deposited into the account, but it also allows the payday lender to take out the balance to repay the loan in the same fashion.
  2. The study also found that some online lenders have the ability to access all accounts under a borrower’s name, not just the one he or she provided on the application. This gives the website power over accounts for which the borrower did not necessarily give his or her permission.
  3. This kind of payday loan is easier to “flip,” meaning make the loan a second time. While in-person transactions require the buyer to come into the store again to renew the loan, the study says that “online loans are often structured to automatically withdraw only the finance charge and continue the loan for another pay cycle.” This can lead to a cycle of debt for the borrower that can be difficult to break.
  4. These websites make it difficult for the borrower to repay the loan amount in full. The study shows that most sites set a default option for repayment that has the borrower pay only the finance charge on the loan each month, which is directly withdrawn from his or her account. Changing this option can be difficult to figure out, and some lenders even require a three-day advance notice if the borrower wishes to pay in full.
  5. Because online loan sites often pay up to $110 for referrals, their goal is to get borrowers to renew their loans rather than repay them in full. Again, this can make it difficult for borrowers to pay off their debts.