Internet payday loans are loans that are expected to be paid back with the borrower’s next paycheck, usually in two weeks. In other words, they are advertised as short-term loans. If the borrower does not advise the lender that he or she intends to make a full payment and close the loan prior to the end of the term, the lender often only withdraws the interest and renews the loan for another month. The assumption on the part of the lender, then, is that the borrower will only pay the interest and the loan can be renewed, even though the loan is only intended to be until payday. In many situations, the borrower simply cannot afford to pay back the loan in two weeks and makes the decision to renew the loan him or herself.
Some states have laws against payday loans; however, their availability over the Internet has made regulation of the loans difficult. People who live in states that prohibit payday loans can easily apply for them online, and may not realize they live in a state that has banned the loan.
Large banks are not the lenders in these situations. Rather, the loans come from payday loan companies. But the banks play a roll if they allow the lender to automatically withdraw money from the borrower’s account. And although that might not sound all that sinister, the banks can make a lot of money off these automatic withdrawals.
If there is not enough money in the customer’s account to cover the automatic withdrawal, the withdrawal can trigger insufficient fund fees, overdraft fees or other financial fees, making money for the bank. According to a report by The Pew Charitable Trusts (“How Borrowers Choose and Repay Payday Loans: Payday Lending in America,” 2/20/13; online at pewstates.org), 27 percent of borrowers are forced into overdraft by an automatic withdrawal from a payday lender.
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NBC News (5/12/13) reports on a man who initially borrowed $400 for a car repair but wound up taking out $3,000 in loans to cover interest costs, owed $12,000 and was kicked out of his apartment.
Officials are now looking into what role the major banks play in allowing payday lenders to do business in states where such companies are prohibited.