Increasingly, down-on-their-luck Americans are turning to companies who offer payday loans to make ends meet one month in the hopes that the next will be better, allowing them to pay off the amount of money they borrowed along with the interest charged by the payday lender. There's just one problem with that scenario. The sky-high interest rates often send the already strapped-for-cash borrower into a debt spiral that seems to have no end. In other words, they've saved themselves today at the expense of buying major trouble tomorrow.
Why then do so many let themselves fall into that trap?
According to an article by the Dallas Observer , the rise of online payday lenders is a big part of the problem. While Texas law places limits on the amount of money and number of loans available to borrowers, online lenders in other states can often circumvent those laws because they only have to abide by the laws of their home state-even when granting loans to Texas residents. Additionally, they often bombard people with ads that promise fast cash and no credit checks. That convenience factor often has financially stressed borrowers hitting click before they think through the implications of signing up for a loan which has such a high interest rate.
Critics of the payday loan industry claim lenders care more about profits than legalities, citing the fact that their collection agencies often engage in the practice of threatening borrowers behind on their loans with jail time for not repaying the debt. Too bad this practice is illegal! But what's worse is the fact that their scare tactics often work on scared borrowers who have no idea that the threat is all bark and no bite. A November 2004 report by the Consumer Federation of America Another found that some internet lenders offer payday loans in all 50 states-despite the fact payday lending is illegal in 15 of them.
As the report says, "Lenders are hard to locate, identify or contact. Some are licensed in their home states, while others hide behind anonymous domain registrations or are located outside the United States." Which makes it just about impossible for effective government oversight. Some also flaunt the Truth in Lending Act and refuse to disclose information about fees and interest rates, a very big no-no.
Despite the fact that some Texas lawmakers are now trying to crack down on payday lending practices in order to protect consumers, many of those lenders are switching their tactics by registering as credit service organizations ("CSOs"). CSOs help people pay down debt, but they also make loans. In this scenario, CSOs who make loans are considered brokers rather than lenders, and in Texas, brokers can charge whatever fees it wants for its services.
Rich Tomlinson, a Houston attorney who unsuccessfully argued a class-action lawsuit claiming that a Texas CSO had actually acted as the lender rather than the broker, is angry that the payday lenders who have switched to the CSO model claim the switch is nothing nefarious and that they really only have the best interests of consumers in mind. "My loss," Tomlinson says, "is the template by which these companies stay alive. And that makes me ill."
If you find yourself taking out payday loans repeatedly, you should really consider seeking out financial counseling. If you're now caught up in a never-ending spiral of debt because of defaulting on these loans, just be aware that bankruptcy may be the solution so that the rest of your tomorrows can be trouble-free-at least when it comes to the cycle of payday loans.