The Consumer Federation of America (CFA) said its survey of 100 Internet payday loan sites found that small loans involving electronic access to consumers' checking accounts poses high risks to consumers who borrow money by transmitting personal financial information via the Internet.
"Internet payday loans cost up to $30 per $100 borrowed and must be repaid or refinanced by the borrower's next payday," said Jean Ann Fox, CFA's Director of Consumer Protection. "If payday is in two weeks, a $500 loan costs $150, and $650 will be electronically withdrawn from the borrower's checking account."
According to the CFA, many of the lenders in the survey automatically renew loans by electronically withdrawing the finance charge from the consumer's checking account every payday. If consumers fail to have enough money on deposit to cover the finance charge or repayment, both the payday lender and the financial institution will impose insufficient funds fees, CFA noted.
The CFA said its research found that online payday loans are marketed through e-mail, online search, paid ads, and referrals. Typically, a consumer fills out an online application form or faxes a completed application that requests personal information, bank account numbers, Social Security Numbers and employer information. Borrowers fax copies of a check, a recent bank statement, and signed paperwork. The loan is direct deposited into the consumer's checking account and loan payment or the finance charge is electronically withdrawn on the borrower's next payday.
"Internet payday loans are dangerous for cash-strapped consumers," stated Fox. "They combine the high costs and collection risks of check-based payday loans with security risks of sending bank account numbers and Social Security Numbers over web links to unknown lenders."
