Should Payday Loans Online Be More Strictly Regulated?

For years, consumer financial protection groups and regulators have warned the public about the dangers of borrowing funds from traditional storefront payday lenders. However, there’s less advice about payday loans online from a company that operates on the internet. Most states have regulations in place for payday loan lenders, but they seem to have more trouble regulating the ones that operate online. Should online payday lending be more strictly regulated? Many legislators and consumer groups say yes while the industry claims that regulation is likely to put them out of business.

Online Payday Loans are Difficult to Regulate

States have found it challenging to regulate the payday loan industry. This clever bunch is adept at circumventing rules designed to reign it in. From moving their operations to Indian reservations to modifying how they identify themselves, payday loan lenders have been resourceful in their attempts to avoid regulation. Processing payday loans online is another way that lenders have been able to stay in business.

The shift to online operations caught the attention of New York State’s financial regulators. Recently, they requested details about the online lending activities of 28 companies that operate in the state. Reuters reports that the New York Department of Financial Services mailed letters to Prosper, Avant, Upstart and Funding Circle. According to the report, regulators want details about the types of fees that these lenders receive or pay out. The agency hasn’t commented about whether it’s asking for this information to establish regulations, but this could be the goal.

The Fastest Growing Sector of the Payday Loan Market

The Huffington Post reports that online lenders, who don’t necessarily offer cash advance loans near you, are currently the fastest-growing sector of the short-term loan lending market. Online payday lenders comprise about one-third of the market. According to a Pew study, from 2006 to 2013, the online segment’s revenue tripled. It went from $1.3 billion to more than $4 billion.

These easy payday loans online offer convenience. However, statistics from the Pew report show that those who borrow online are almost twice as likely to suffer from overdraft charges on their bank accounts as consumers who decide to borrow from a traditional storefront lender. Those who borrow through online lenders also default on their loans more frequently. This would indicate that tougher restrictions against online lenders are warranted.

About the Operational Practices of Online Lenders

Traditional banks use deposits to issue loans, but online lenders have avoided this practice. Instead, these lenders contact retail investors who are interested in funding loans, and they put them in touch with borrowers directly. In some cases, they extend the funds to borrowers personally, and then, they bundle a collection of loans into securities that are sold to investors.

According to consumer groups, online lenders may pose a greater risk to struggling borrowers than storefront businesses do as they could lead consumers into more challenging financial situations. Jay Speer, the Virginia Poverty Law Center’s executive director, said, “They loan to people not even caring whether they can pay the whole thing off.”

A Dizzying Number of Choices

Tom Feltner, an expert at the Consumer Federation of America, said, “Borrowers online have a dizzying amount of choices for payday loans.” He went on to say, “One of the biggest concerns is that those loans are not all regulated. They don’t always comply with consumer protection laws in the states where they operate.” Along with offering traditional payday loans, online lenders are also starting to offer installment loans. With this funding option, consumers have extended repayment terms, so they could be in debt longer.

Other Risks of Requesting Online Payday Loans

In addition to the debt risks that come with payday installment loans, consumers are also at risk of inadvertently giving out their financial information to lead generators. According to the Consumer Financial Protection Bureau, lead generators collect a borrower’s personal data such as his or her social security number and checking account numbers. This may lead to other companies gaining access to the consumer’s personal information.

It’s Up to Consumers to Do Their Homework

Due to their quick processing, online payday loans are an understandable temptation. In addition, a number of companies have modified their operations to follow guidelines established by the Federal Trade Commission. While easy payday loans are often legitimate, consumers should always research a company before sharing personal financial information with its staff members. Borrowers should also understand a lender’s payoff terms and fee assessments prior to taking out any type of loan. To read more about whether payday loans online should be more strictly regulated, head to the Personal Money Store.