We've heard a lot about the dangers of traditional payday loans and many states have clamped down on lending practices that exploit the poor and vulnerable. But as the state and federal governments have clamped down on payday lending a new crop of payday lenders have sprung up online. Many of these online payday lenders evade federal and state laws leaving borrowers with little or no protection.
Below are some of the dangers associated with taking out a payday loan online:
- Many of the online payday lenders are not licensed in the state of Texas and therefore are not under the jurisdiction of Texas law. This leaves some consumers with no protection. And if you think you will be protected by federal law after you take out your payday loan, think again, consumer advocates are finding that many of the online payday lenders are located in foreign countries such as Costa Rica and fail to follow both state and federal law.
- Online payday loans operate differently from storefront payday loans in that instead of using a borrower's check to repay the loan, they use an electronic transfer authorization (ETA) to directly go into the borrower's bank account. This means that the borrower is unable to cancel the payment like they could if they used a traditional storefront payday lending service. And even if they attempt to cancel the ETA many payday lenders have language in their agreements that authorize them to draw up electronic checks if they are unable to directly transfer funds from the borrower's account.
- Online payday lenders often automatically renew a payday loan at least three times before they begin to actually put the borrower's payments towards the principal of the loan. This practice has raised the ire of many regulators and consumer advocates who are looking to ban these unscrupulous online payday lenders in their states.