This is a guest post from Caroline Palmer who is an associate attorney with OVLG. Caroline doesn’t advocate the use of payday loans. Rather, she advises her clients against them and hopes to provide more awareness about the pitfalls in this post.
As the economic crisis continues, many people are turning to payday lenders to solve their immediate financial needs. Payday loans can help consumers with their short term cash flow problems, but they also lead them into an out-of-control spiral of debt. Therefore, it is important to stay away from payday loans.
Payday loans are not legal in every state, 37 out of 50 states have made payday loans illegal, including New York, Connecticut, New Jersey, Maryland, and Massachusetts. Arizona is expected to join the growing number of states outlawing payday loans before the year has ended. Every state that permits payday loans has enacted laws to protect consumers, such as limiting the number of loans a consumer can take out at one time, the amount of interest a lender can charge, and in some states, the amount of the loan.
The Federal government has also enacted laws to protect consumers from abusive lenders during collection actions, called the Federal Fair Debt Collections Act (FDCPA). These laws, which have been enacted in similar laws by every state, are designed to protect the consumer against unfair collection practices. While the Federal government has limited the FDCPA to lenders and not third party collection agencies, many states have broadened their collection practices laws to include collection agencies.
Even with all the legislation, there are still ways payday lenders can take advantage of an unsuspecting consumer. And since both the State and Federal governments lack the means to monitor every company offering loans, many payday lenders do everything they can to get as much money out of their customers as possible, whether it’s legal or not.
These companies take advantage of consumer ignorance by offering the consumer loans that are illegal in their state, containing terms that cause the consumer to keep rolling over their loans just to make ends meet. And once a customer ends up in collections, these companies take advantage of their customers even more by claiming state and federal law does not apply to the company, including the law that states no one can be imprisoned for debt. Others have purposefully filed collection suits in jurisdictions that do not have the power to enforce judgment knowing the customer, who cannot afford legal assistance, is caught in their trap. Still other payday lenders sell their “bad” loans to collection agencies for fast money, caring little that many of these companies use the same fraudulent and harassing tactics to get money from consumers.
Another pitfall for payday consumers is the high interest rates. Most payday lenders charge as much as they can get away with according to state law. This means the consumer could end up paying more in interest than in principal, which is how most consumers end up deep in debt.
In addition to all the interest charges, payday lenders are notorious for their high fees and penalty charges assessed if the consumer gets behind on their payments. While there are limits on interest and sometimes on the amount of the loan, there is no state or federal regulations concerning the amount of these charges that a payday lender can charge.
Therefore, though payday loans may look like a great idea when you’re strapped for cash, but if you take one out you can end up in an even worse financial situation than before. Hundreds of people in the United States have found themselves facing bankruptcy and credit score ruin due to one payday loan that ballooned into a crisis worse than the one they faced when they took out the payday loan.
What do you think about these payday loan pitfalls?
