Payday Loan Scams: The New Loan Sharks

The Internet is full of them. Loan companies offering quick cash advances to meet life's unexpected expenses. Bad credit? No problem. Sign here. Millions of Americans are in debt to modern day loan sharks and getting deeper in the rut by the day.

In Arkansas, Attorney General Dustin McDaniel has filed suit against two online payday loan companies and their owners. The lawsuit alleges that Arrowhead Investments Inc., Galaxy Marketing Inc. and their owner Christopher Hodes loaned money to Arkansans charging interest rates of up to 782 percent.

And the Arkansas case involves only so-called "legitimate" payday loan companies. In April this year, TimesDaily.com, an Alabama news site, reported a scam by a bogus loan company and a fictitious law firm that were working a "non-payment" scam, further victimizing individuals who were already in deep to payday loan companies.

In a flagging economy with a jobless rate holding at an almost unprecedented sustained level of 9.5 percent, payday cash advances are an alluring prospect for families facing the loss of homes, automobiles and other essentials that most Americans consider necessities. Foreclosures are up with no end in sight, and credit card interest rates are as high as 25 percent. The attraction to quick money is understandable when payments come due and the funds to make ends meet simply aren't available.

But many payday advance companies are predatory, and about the only difference between them and the loan sharks of the past, is that they don't break legs when the borrower fails to pay the loan along with its exorbitant "vig" (interest). But the consequences are often severe. Missing payments on even the smallest advance can result in mounting interest rates, and drive the borrower into bankruptcy or worse.

In recent years the payday advance industry has taken a disturbing turn. More and more, loan companies are targeting the elderly and disabled. "These people always get paid, rain or shine," a former payday loan manager told Wall Street Journal writers Ellen E. Schultz and Theo Francis in 2008, "[they] will always have money, every 30 days." In other words, those who are most able to pay but can least afford the freight.

While usury laws in some states specifically limit the amount of interest payday advance companies can charge borrowers, and a handful of states have outlawed them completely, the payday loan business is a $33 billion industry. Payday loan companies in the United States bring in more annually than McDonald's and Burger King combined. Add in check cashing services and the take is an astounding $250 billion.

An amendment to the recently passed financial reform package in congress that would have placed new regulations on payday loan companies, failed to gain traction last May as the bill worked its way through the Senate. The amendment would have given the Federal Reserve Board authority over the industry, which is currently regulated on a state basis.

To be fair, legitimate short-term loan companies do exist. Borrowers should research before going into debut to companies that charge 400 percent compounded interest and more on small payday advances. And, for those who are already in too deep get out short of filing bankruptcy, there are other avenues.

Ironically, the payday loan industry's obscene rates of interest have given rise to another industry-an industry within the industry of "poverty finance." The Internet is chockablock with loan companies offering to eliminate payday loan debt for more reasonable interest rate. Often these companies offer payment plans.

Perhaps the best advise is obvious: Don't borrow short-term money. But in the current financial crises sometimes options are limited and needs are pressing. Think before you borrow and never borrow more that you know you can payback on the date due.