High interest rates often lead consumers into insurmountable debt
A new report suggests that creditor harassment in the online payday lending industry is widespread, with a significant portion of consumers reporting being threatened and having unauthorized withdrawals made on their accounts, according to the New York Times. The Pew Charitable Trusts study shows that many lenders, especially those that are registered offshore, flout state laws. Critics of the industry also say many lenders rely on a business model that tries to get consumers trapped in an endless cycle of debt.
Although online payday lenders only account for about a third of all payday loans, they make up 90 percent of all complaints lodged by consumers against the industry. Pew found that a third of consumers had been threatened by an online payday lender, including being told that they would be sent to prison if they did not pay back the loan. In the vast majority of cases, a lender cannot threaten a borrower with prison for non-repayment of a loan.
A third of consumers also reported that an online payday lender had made a withdrawal from one of their accounts without being authorized to do so. Also, nearly 40 percent of consumers said their financial and personal information had been sold to other companies without them knowing about it. Some people even reported withdrawals being made from their accounts after they had inquired about, but had not actually applied for, a loan.
Debt business model
The problem with online payday lenders is that many of them are registered overseas and thus flout many of the state laws that are designed to reign in abuses. The federal government is currently working on legislation regulating the payday industry.
Payday loans, whether obtained online or through a storefront, are small loans charged at high interest rates. The average annual interest rate for a payday loan, according to Pew, is 652 percent. Critics of the industry say lenders rely on their customers remaining in a cycle of endless debt. According to Bloomberg News, many consumers set up loans so that only the interest is paid every couple of weeks, thus requiring the consumer to take out further payday loans indefinitely just to keep up with interest payments.
Debt, as the above story shows, can quickly develop into a problem that can overtake a person's life. Simply trying to keep up with interest payments often means that consumers find themselves getting deeper into debt without any prospects of seriously improving their financial situations.
Such insurmountable debt often requires creative solutions. The truth is that hiding from creditors and trying to keep up with high interest payments is unlikely to provide much financial relief in the long term. Although bankruptcy is not for everyone, for people who are struggling to cope with debt it could be a way to get back on their feet. A bankruptcy attorney can provide valuable information about bankruptcy options and whether declaring bankruptcy may provide a long term solution to debilitating debt problems.