Alert
Close

Think you know AARP? What you don't know about us may surprise you. Discover all the 'Real Possibilities'

Highlights

Open

Contests and
Sweeps

Dream Vacation Sweepstakes

10 weeks. 10 amazing trips. Seize your chance to win!
See official rules. 

Driver Safety

Piggy bank on the road - AARP Driver Safety

Take the new AARP Smart Driver Course!

PROGRAMS

AARP Foundation Tax-Aide

You can get free, face-to-face tax assistance nationwide.

Money Matters Tip Sheets

Download and print out these PDFs to help with your financial matters.

AARP Books

Visit the Money Section

Enjoy titles on retirement, Social Security, and becoming debt-free.

webinars

Learn From the Experts

Sign up now for an upcoming Money webinar or find materials from a past session. 

Jobs You Might Like

most popular
articles

Viewed

Commented

Scam Alert

Loan Sharks of Today

Can online payday lenders escape the usury laws?

Payday lenders have never had a great reputation. Often operating out of neon-lit storefronts in hard-up neighborhoods, they’re known for saddling borrowers with spiraling debt on short-term loans.

But when they go online, payday lenders may pose an even greater risk to needy Americans.

“Unlike a payday loan that you might get from a local business, online payday loans require your bank account number,” says Stephen A. Cox, president of the Council of Better Business Bureaus. “As a result, the borrower is at the mercy of the lender as more money than he counted on is withdrawn from his account.”

Why are the withdrawals so high? Some online payday lenders charge outrageous interest rates—up to 800 percent—claiming they are exempt from state usury laws, which cap rates, because they operate from Native American reservations that are “sovereign nations.”

The BBB has been flooded with complaints from consumers who tell similar stories. They take out small short-term loans. Then the vicious cycle begins: Their payments go toward recurring finance charges, not the principal, and they wind up paying many times the original amount.

Tribal Connections?

Many online payday lenders are not licensed, and use the “sovereign nation” claim as a reason they don’t have to be, according to the BBB and others.

“Internet payday loan providers are the loan sharks of today,” says West Virginia Attorney General Darrell McGraw, who last year sued a dozen Internet payday lenders.

In his state, some online lenders were charging residents interest rates more than 45 times higher than the legal 18 percent cap. McGraw also found that some lenders who claimed tribal sovereignty were not actually members of the tribe, but were merely renting space to claim shelter from state and federal laws.

Historically, payday loans have been short-term and for small amounts—in theory, money to tide you over to the next paycheck. The typical payday loan is for $325, with a repayment period of two weeks. But with high fees, that payback can become $377 by day 14. If a borrower cannot pay it, the loan is extended with more fees. Alternatively, an additional loan may be made, a practice known as a loan flip.

Skirting the Law

In the end, reports the nonprofit Center for Responsible Lending, the average payday borrower of $325 ends up repaying $793.

With online payday lenders who skirt the law, the situation can be even worse. One Massachusetts woman paid $1,700 on a $225 loan she received from Ace Cash Services, reports the BBB. A Pennsylvanian said he was charged a 547 percent interest rate on a $300 loan by a lender called United Cash Loans. Both agencies claim they are based at the same address on an Oklahoma reservation.

Other companies generating numerous BBB complaints include OneClickCash.com, 500 FastCash.com and AmeriLoan.com.

How to Protect Yourself

Think twice before borrowing from any payday lender—especially an Internet-based firm. “The bottom line here,” says Cox, “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.”

A better strategy: Look into a home equity line of credit or another loan from your bank. Better yet, try to establish an emergency savings fund. “Our data show that families [earning] $25,000 a year are eight times more likely to take payday loans when they have no savings as compared to having just $500 in savings,” says Jean Ann Fox of the Consumer Federation of America, a nonprofit advocacy group.

If you must use a payday lender, be sure you’ll be able to quickly repay the debt. And beware of these red-flag warnings: lenders who give sketchy information about their location or contact information, those who don’t ask for any background information other than your bank account number, or those with poor ratings from the BBB.

Topic Alerts

You can get weekly email alerts on the topics below. Just click “Follow.”

Manage Alerts

Processing

Please wait...

progress bar, please wait

Tell Us WhatYou Think

Please leave your comment below.

SCAM ALERTS

Discounts & Benefits