Online lenders flout state laws


$500 in your bank account within 24 hours? With the click of a mouse, that money can be yours in the form of a loan. But are these fast-cash, online loans a smart deal?

"It's been a tight spot. I wasn't going to make it to pay some bills I really needed to pay," said Dana Ratcliff, Payday Loan customer.

So when online lenders enticed Dana Ratcliff with offers to get instant money, she couldn't refuse.

"I see the ads on the Internet. within 24 hours we can have $500 in your account. and when you are in a desperate situation, you go okay," she said.

Ratcliff took out a $500 loan to be paid off in 18 days.

She agreed to finance charges of $150 and planned to pay part of her loan off early, hoping to reduce those charges.

"And they made it sound like, you know, that was a good idea."

But a few days later when Ratcliff went to pay part of her loan off early, the online lender automatically extended the loan, adding on another $120 finance charge.

$275 in fees to borrow $500.

"It was too much for me. That's why I got in touch with you. It was like, this is unbelievable," she said. 

Payday lenders have been under fire for years because the fees they charge effectively compute to interest rates of 300 to 1000 percent APR.

The cost of payday loans is so high, 19 states have effectively banned them, D.C. and Maryland included.

But online pay day lending is thriving, an easy way for lenders to skirt state laws.

"I see people struggling every day. Hard-working people," said Elijah Cummings, Maryland Congressman.

Rep. Cummings says he knows why families are enticed by these quick fix online loans.

"It's like quicksand. It's like quicksand and people are already drowning in debt and this puts that drowning-the speed of that drowning on steroids," he said.

Earlier this year, Cummings co sponsored the Safe Lending Act.

If passed, the bill would force online lenders abide by the laws in the state in which they're lending.

It would also allow the federal government to help enforce state's rules.

"So what we want to do is be a deterrent. We want the federal government to be able to step in, and help out," he said.

Consumer Reports reached out to the Online Lenders Alliance, which represents companies who offer Internet payday loans.

It opposes the Safe Lending Act and says it would "effectively eliminate online access to short term credit for millions of Americans."

It adds that it supports the Consumer Credit Access, Innovation and Modernization Act, which it says would "create a federal framework for online lenders to be regulated and chartered."

As for Ratcliff, she ultimately paid $210 to borrow $500.

Next time, she says she'll avoid payday loans entirely.

"Never. I would never go through that again," she said.

Consumer Reports: Beware payday loans!