If you need a short term loan, you may be tempted by ads touting online payday lenders. But before you click on a link, the Federal Trade Commission (FTC), the nation's consumer protection agency, has a cautionary tale to tell.
The FTC recently sued several online payday lenders for violating federal laws. The lenders allegedly lied about how much their loans would cost, required borrowers to allow the lenders to take money from their bank accounts automatically, and threatened to sue the borrowers or have them arrested for non-payment.
Here's how the scam allegedly played out: The online payday lenders required borrowers to provide bank account information so they could deposit the borrowed funds electronically and withdraw the repayment amount from the account later. The lenders claimed that the repayment amount would be the amount borrowed plus a one-time finance fee, and that this amount would be withdrawn on a particular date. Instead, the lenders made multiple withdrawals from the borrowers' bank accounts and assessed a new finance fee each time. The result of this scheme? The borrowers paid much more than the stated cost of their loans.
In a typical example, a person borrowed $300 with a stated one-time finance fee of $90. The borrower expected that the loan would be repaid in a single withdrawal of $390. But the lender began a series of automatic withdrawals, assessing a $90 finance charge each time. By the last withdrawal, the borrower would have paid $975 instead of $390 to repay the loan.
In addition to allegedly misrepresenting the terms of the loan, the lenders doubled as unscrupulous debt collectors who falsely threatened to sue the borrowers or have them arrested.
Payday loans can be expensive; other credit offers may come with lower rates and costs. It's important to shop and compare available offers before you decide to take out an online payday loan. When you are comparing credit offers, use the Internet or other sources to learn about the reputation of credit providers.
To learn more about alternatives to payday loans, and special protections for servicemembers, see Payday Loans Equal Very Costly Cash: Consumers Urged to Consider the Alternatives.
The FTC works to prevent fraudulent, deceptive and unfair business practices in the marketplace and to provide information to help consumers spot, stop and avoid them. To file a complaint or get free information on consumer issues, visit ftc.gov or call toll-free, 1-877-FTC-HELP (1-877-382-4357); TTY: 1-866-653-4261. Watch a video, How to File a Complaint, at ftc.gov/video to learn more. The FTC enters consumer complaints into the Consumer Sentinel Network, a secure online database and investigative tool used by hundreds of civil and criminal law enforcement agencies in the U.S. and abroad.