Chances are you've seen an ad for an online payday lender lately, whether through e-mail, online search, or paid ad. The process is simple: a borrower fills out an online application form providing such information as bank account and Social Security numbers, plus information about employment. (Sometimes the borrower is asked to fax a voided check copy, a recent bank statement, and signed paperwork.)
If approved, the loan is deposited directly into the borrower's checking account and the loan payment and/or finance charge is electronically withdrawn on the borrower's next payday.
A typical advance falls between $100 and $500, though borrowers with good repayment records can receive up to $1500 overnight*. There is cost in return for convenience, as loans generally have interest rates in the range of 390 percent to 780 percent.
Still, even though lenders can garner such rates for their services, the borrower is not without protection. For example, Congress passed a law in October 2006 that caps lending to military personnel at 36% APR.
Some legislators are looking to apply this kind of protection to the general public, claiming that such predatory lending practices hurt the lower-earning classes who can least afford it.
*A survey of 100 internet payday loan sites found loans from $200 to $2,500 were available, with $500 the most frequently offered. Finance charges ranged from $10 per $100 up to $30 per $100 borrowed. The most frequent rate was $25 per $100, or 650% annual interest rate (APR) if the loan is repaid in two weeks. (Source: The Consumer Federation of America)
