There are few places that lead consumers into deeper debt then payday lenders but, due to state and federal restrictions imposed in the last few years, revenue from brick and mortar payday lending companies has remained flat during the last four years.
Unfortunately, online payday lenders have sprung up left and right and their revenues have more than doubled in the same time period, from $1.5 billion back in 2006 to over $4 million dollars last year, in 2013. In fact, according to a study by the Milken Institute, nearly 40% of all payday loans in 2012 were initiated online.
It’s also unfortunate that, although they don’t differ substantially from their storefront peers, online payday lenders put consumers at substantially greater risk for things like bank fraud and identity theft. For example, many payday lending websites are actually fraudulent websites called “lead generators”. These websites ask borrowers for vital information like Social Security numbers and bank accounts, in order to supposedly find a lender for the borrower, but once that information has been given it’s then sold to the highest bidder.
Much of the growth in online payday lenders is due, as we mentioned, from stricter regulations that have been imposed by states and by the federal government. In both Tennessee and Texas, for example, online payday lenders can charge nearly 400% interest on their loans, interest rates that can quickly drown someone in debt. Recently however a number of states have started to impose interest rate caps on payday Loans, Including Arizona and Montana at 36% and New York at 16%.
In 25 different states, including Georgia, Vermont and New Hampshire, brick-and-mortar payday lending storefronts have almost disappeared because of these new regulations. Of course when there’s money to be made someone will always find a way around the laws and many online lenders advertise their services in states where there are heavy restrictions, attracting people to their incredibly high interest loans.
According to Kathleen McGee, the chief of the New York State Attorney Generals Internet Bureau, “the online proliferation [of payday lenders] is a product of these companies being able to hide their behavior by virtue of being online in a way that a traditional bricks and mortar business that has a street face and signage cannot.”
It was just last January that Western Sky, a payday lender based in Timber Lake, South Dakota, was fined by McGee for conning consumers in New York into taking out payday loans with their company, loans that had interest rates much higher than New York allows.
How to Protect Yourself from Payday Loan scams
Simply put, the best way to protect yourself from being scammed by a payday loan, or spending a huge amount of money to pay off the interest on a real payday loan, is to never take a payday loan out in the first place. Since almost 70% of payday loan borrowers are borrowing money to pay for things like credit card payments, utility bills mortgages, most would be better off talking to their landlord, credit card company or cable company rather than taking out a payday loan. In most cases, unless you’ve fallen very far behind, they will work with you in order to make sure that you get back on track and keep those payments coming.