BBB: Predatory payday loans, scams could cost double

FILE - Payday Loan Sign
FILE - Payday Loan Sign(Gregory F. Maxwell / GNU)
Published: Sep. 1, 2022 at 11:38 AM CDT
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TOPEKA, Kan. (WIBW) - According to a new study from the Better Business Bureau, predatory payday loans and scams could end up costing double the loan amount.

As Americans lost jobs and struggled to make ends meet during the COVID-19 pandemic, the Better Business Bureau says many turned to payday loans and short-term solutions which can increasingly be found online.

The BBB noted that this not only allowed predatory lenders to thrive as many borrowers contended with sky-high interest rates and fees but also created an environment for scammers.

The BBB said its new investigative study found payday loan laws are handled on a state-to-state basis and among the 32 states they are available in, a complicated web of regulations makes the industry difficult to track. One common thread, however, in the triple-digit interest and significant rollover fees.

From 2019 to July 2022, the BBB indicated that it received nearly 3,000 complaints about payday loan companies with a disputed amount nearing $3 million. Additionally, more than 117,000 complaints were received against debt collection companies.

According to the BBB, complaints often noted that borrowers felt ill-informed about the loan terms. It said many customers fell into a “debt trap” with stacked interest and fees that leaves a bill nearly twice the amount of the original ask.

One woman in St. Louis recently told the BBB that over the course of her $300 loan, she paid more than $1,200 and still owes another $1,500.

The BBB noted that scammers did not miss an opportunity to take advantage, either, with its Scam Tracker fielding more than 7,000 reports of loan and debt collection scams that represent about $4.1 million in losses.

Posing as payday loan companies and debt collectors, the BBB said scammers arm themselves with stolen information to convince residents to hand over their bank account information and cash. In one case, it found that hackers had stolen and posted detailed personal information and financial data for more than 200,000 residents - and this was not an isolated incident.

A woman from Wisconsin reported to the BBB that she received a phone call from a supposed debt collector who stated that legal action was pending due to an overdue payday loan debt. For fear of legal trouble, she ultimately sent the scammer $500 and her credit card information. Over the course of the next few months, her card had been charged again and again until she canceled it.

The BBB indicated that regulators at the federal level have sought stronger laws to curb predatory lending, however, those regulations were rolled back which left states to make their own rules about interest rate caps and other aspects of the loan. More than a dozen states have introduced legislation to regulate payday loans, but the landscape for legally operating payday lenders remains inconsistent from state to state.

Currently, the Bureau said payday loans are barred in 18 states. It also said the Military Lending Act sets a 36% rate on certain payday loans.

With respect to fraudulent behavior, the Bureau indicated that law enforcement is limited in what it can do to prosecute payday loan scams. It said some legal lenders have attempted to prevent scams by educating customers on how they will contact borrowers and ways that are not allowed.

The study advised residents to do careful research into all borrowing options as well as the terms and conditions of a payday loan before they sign any documents to take out a short-term loan. The study also made the following regulation recommendations:

  • Cap consumer loans at 36%
  • Make more people aware of no-fee extended repayment plans
  • Require lenders to test whether customers can repay loans
  • Require Zelle, Venmo and other payment services to offer refunds in fraud cases

To report a payday loan scam or lodge a complaint, click HERE.