Unlike the loan sharks of yore, they no longer threaten to break your kneecaps, but short of that -- pretty much anything goes.
But when you're living teeny-paycheck-to-teeny-paycheck, a sudden emergency can leave you with nowhere else to turn. All of a sudden, an interest rate in excess of 500 percent can seem, if not reasonable, at least an option (especially because the rate is not usually presented in APR terms, but as "I can give you $100 now, and you'll pay me back, plus $20, in two weeks," which sounds almost reasonable.).
If you can't pay the full $120 two weeks from now, your lender will "kindly" accept partial payment and roll over the loan... You can see how quickly someone can get lost in debt.
Because payday lenders rely on those whose financial options are few, and whose financial acumen is often also low, some states (15 to date) ban such loans. The lenders' solution? Move online.
New York Times journalist Jessica Silver-Greenberg reported late last month that these lenders have found willing co-conspirators in the major banks (full article, here). The banks themselves don't dirty their hands with such loans directly, but they're enablers, permitting "the lenders to withdraw payments automatically from borrowers’ bank accounts, even in states where the loans are banned entirely. In some cases, the banks allow lenders to tap checking accounts even after the customers have begged them to stop the withdrawals." (emphasis added)
The bankers' explanation? They are "simply serving customers who have authorized the lenders to withdraw money from their accounts."
This is ingenuous, at best.
Especially since the withdrawals often "set off a cascade of [highly profitable] fees from problems like overdrafts."
I doubt that there are any truly ethically-minded payday lenders, but moving online has made it even easier for the true scam artists to operate.
While the loans are simple to obtain — some online lenders promise approval in minutes with no credit check — they are tough to get rid of. Customers who want to repay their loan in full typically must contact the online lender at least three days before the next withdrawal. Otherwise, the lender automatically renews the loans at least monthly and withdraws only the interest owed.
Customers have the legal right, under federal law, to stop such automatic withdrawals. But many have complained that their banks have ignored their requests to do so.
But there's a glimmer of good news.
In today's Times, Silver-Greenberg reports that JP Morgan Chase is changing its policy to give its customers greater control to halt the automatic withdrawals and close their accounts (full story, here). Unfortunately, both Bank of America and Wells Fargo said that their policies regarding payday loans would be unchanged.
It's also only a glimmer of good news because JP Morgan Chase said that part of the policy change would include "training to their employees so that stop-payment requests are honored."
Wouldn't you expect your bank to honor your request to stop payment from your account anyway?!?