What You Should Know About Online Lending Services
By Geoff Williams | July 26, 2016
Easy money that may be hard to pay back.
You've seen the commercials. You need money, and these websites can give it to you, often within 24 hours and without a credit check. Should you take the offer?
Common sense would suggest no. Everyone knows that there is no free lunch, and the terms of many quick and easy loans mean that a financial company will have you for lunch. Granted, not all online lending services are shady. Many mortgage lending companies are reputable, as are many lending companies that offer low rates based on a high credit score.
But if you have lousy credit, and you're still being offered a loan, that's a red flag that you're about to accept money that you'll later regret.
So before you use an online lending service, do your research – check out the online reviews, comb the internet to see if there's a barrage of negative press on the company and study the loan's fine print. At least then if you still take the loan, you'll know what you're in for. And what might that be? Here are details you won't often find trumpeted in the ads for online lending services.
These are often high-interest loans. We're talking extremely high-interest. For instance, if you take out a $1,000 loan, you might be saddled with an annual percentage rate of 300 percent, which is typical for these sites, although there are reports of some sites offering APRs of over 1,000 percent.
Your interest will likely accrue daily from the moment you take out your loan, and the payments will likely be spread out in a way so that the financial pain doesn't look too bad – say, $258 a month. But an arrangement like that is good for you only in the short term and very good for your lender in the long term. Over the course of eight months, for example, you could end up paying more than $2,000 for a $1,000 loan.
You really need to look at whether the loans are sustainable, "without repeated rollovers," says Sean Coffey, the media and development manager for California Reinvestment Coalition, a nonprofit that promotes fair and equal access to credit for all communities in California. "And you should look at whether or not the interest rates, and any other add-on fees, charged are fair," Coffey adds.
Coffey brings up the Military Lending Act, which states that if you're an active duty member of the armed forces or on active Guard or Reserve duty, you can't be charged an interest rate higher than 36 percent on many consumer loans, including many payday loans, auto title loans and tax refund anticipation loans.
Says Coffey: "If 36 percent APR is good for the military, why isn't it good for all other consumers?"
These lending services are connected to your bank account. Online lending services give you money through a direct deposit into your bank account, often the very next day. They also accept your payments via automatic withdrawal from your bank account.
That can be a problem, says Katie Ross, education and development manager at American Consumer Credit Counseling. "Borrowers may struggle to maintain funds in their account, so there is an increased risk of overdraft penalties," she says.
So now, not only are you stuck with a really terrible loan, your bank account is in the negative. Whatever financial problem you fixed by taking out the loan has spawned several new money problems.
If you repay the loans, you may be asked to refinance. Paying back the loan on time? Great, you may be rewarded by being invited to stay in debt. Don't be surprised if your lender gives you the opportunity to refinance the loan before it's paid off – which will just keep you indebted to the lender even longer.
Your personal information will probably be sold. That's right. If you go to a lending site asking for a loan, you may soon feel like Cinderella at the ball, being courted by many suitors.
"People should be very cautious about using online lending services because in some cases, the website you're visiting may not be the actual lender," Coffey says. "It may be a broker who will sell your information as a lead to other lenders. This means your information may be sold to multiple lenders, and you may get phone calls from firms long after you've secured a loan or no longer need one."
Sure, in some cases, who cares? Aren't you already signed up for every mailing list under the sun? You belong to every rewards club there is. Your personal information is a commodity, and some part of your life is always being sold.
But – do you really want this part of your life sold?
You'll have little recourse if you get in trouble with these loans. Michael Bovee meets many consumers who get in trouble with online lending services. Bovee is the founder of Consumer Recovery Network, a debt and credit education website.
Bovee points out that many online lending services aren't tightly regulated in most states. "Tougher national rules at the federal level are coming, and that can help reshape these lending websites' business practices and loan rates. But even then, there will be traditional lenders that offer far more competitive loans and rates," Bovee says.
But right now, if you get in trouble and can't pay off your loan, good luck, according to Bovee.
"Online lenders are not nearly as flexible to work with in order to consolidate into affordable payment plans. Many flat out refuse to work with nonprofit credit counseling agencies in the same way nearly all banks do," he says.
Bovee sometimes encourages consumers to file for bankruptcy after they get in too deep with online lending sites.
"Just yesterday, I consulted with a mother and daughter about the daughter's two unsecured credit cards and seven online loans she could no longer keep up with," Bovee says.
The fact that she was able to get seven loans? That says something about the ethics of many online lending companies, according to Bovee.
"There is no way a typical lender would have agreed to the third loan, let alone the seventh," he says. "But that was not the case with the online lenders. Even though the capacity for this young millennial to pay back her loans based on income was glaringly missing, the loans went through … and through some more."
But doesn't the millennial shoulder some of the blame?
"Of course," Bovee says. "But at some point, even overly drunk people are cut off by the bartender, and the party winds down."