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The Risks

Consumers : Beware. This is the warning issued by The Consumer Federation of America (CFA) to consumers planning to apply for payday loans from Internet sites. According to the CFA, payday loans costs up to $30 per $100 loaned and the annual interest rate may shoot up to 650%.

In a survey conducted by the CFA, there is a great danger to consumers borrowing money by sending their personal financial information to the Internet. The survey showed that an additional $30 is charged for every $100 loan from the Internet . In two weeks, a $500 loan amounts to $150, and $650 will be taken away from the checking account of the consumer.

By automatically withdrawing the finance charge from the consumer, the loan is renewed. If the amount is insufficient to cover the finance charge or repayment fee, charges will be imposed to the consumer by both the lender and the bank.
Payday loans can be seen everywhere. They pop-up on your screen, on your email or through referrals. By simply filling out an application form and giving out personal information like bank account numbers, social security and employment information, the loan is deposited directly into the borrower’s account and payment is taken out of the account on the next payday.
For the budget-constrained consumer, online payday loans offers both collection risk of the loan as well as the security risk of sending bank information.

Web sites offering payday loans automatically renew loans by simply withdrawing the finance charge from the consumer’s account prolonging the loan for two more weeks. Some lenders asks consumers for more steps to repay the loan. The loan principal is reduced with each renewal.

Payday lenders offer biased terms like mandatory arbitration, non-participation in class lawsuits and non-filing of bankruptcy in their contracts. Consumers may also be advised to keep their bank accounts active until repayment of loan. Some even seek for "voluntary" wage assignments.

CFA advises borrowers to avoid borrowing money by simply submitting post-dated checks as a means of security. Payday loans are too costly and repayment is difficult. Furthermore, consumers are advised not to divulge their bank account numbers, social security number and other financial information to anonymous companies. Shopping for lower credit on cost and comparison of the dollar finance charge and the APR can be done in order to get the best deal available. Likewise, seeking credit counseling and legal assistance may also be helpful.

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