BBB Warns Against Online Payday Lenders That Claim the Laws Don’t Apply to Them

May 24, 2012

The Better Business Bureau Serving Greater Houston and South Texas is warning cash-strapped families to beware of some online payday lenders that claim they are not beholden to state or federal laws regarding licensing requirements, debt collection practices or caps on interest rates.

Hundreds of people have complained to BBB after signing up for a payday loan on various sites. Complainants state that they agreed to what they believed was a one-time payday loan — typically a few hundred dollars to be paid off in two weeks. They supplied their bank account information to the lender and the money was promptly deposited.

The arrangement quickly turns into a debt spiral. Complainants state all of their subsequent payments went toward paying off recurring finance charges and never toward the principal. As a result, they report paying two and three times the amount of the original loan and still having the same amount of principal to pay off.

Many complainants were surprised to learn that the online lender was not licensed by the state and charged interest rates well over what was allowed by their state usury laws. When confronted, the lender typically responds that they don’t have to follow state or federal laws — often claiming that they are based in another country or on Native American reservations and are sovereign nations.

A story on online payday lending in the Los Angeles Times cites that state officials and consumer advocates find it impossible to track this unregulated industry but, “suspect that it involves thousands of Web sites generating billions of dollars in revenue nationwide.”

“The bottom line here is that if you are handing over your bank account information online to get a payday loan without doing your research, you are setting yourself up to pay hundreds and even thousands of dollars more than you bargained for,” added Cox.

When looking for a payday loan online BBB recommends the following:

Consider all of your options. Payday loans can be extremely expensive if you are unable to pay the loan off quickly. The Federal Trade Commission recommends looking into a short term loan from your bank, contacting your current creditors quickly to explore payment options, working with a credit counseling center or at the very least, shopping around for the best interest rate and terms. Because of concerns with online lenders, try to find a brick and mortar location before settling on a lender.

Look for the red flags. Unscrupulous online lenders often wave the same red flags including not being forthcoming about their location or contact information. Also be cautious of any lender that doesn’t ask you for any background information outside of your bank account number.

Research the lender with the BBB. Always check an online payday lender’s reliability report online before you hand over any bank account information. BBB Reliability Reports are available for free online and will tell you how many complaints the BBB has received, how the company responded to complaints and the BBB’s overall letter-grade rating.