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By Herb Weisbaum ConsumerMan
msnbc.com contributor
updated 3/18/2010 8:17:16 AM ET 2010-03-18T12:17:16

I’ve warned you before about the pitfalls of payday loans – the exorbitant interest rates and the danger of getting sucked into an endless cycle of debt. Now there’s a relatively new player in the short-term loan game that makes the payday loan store down the street seem like a bargain.

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This month the Better Business Bureau issued a consumer alert to warn cash-strapped families about disreputable online payday lenders who have no regard for the law.

“We have received hundreds of complaints from people who’ve signed up for a payday loan on sites like OneClickCash.com, 500FastCash.com, rbtloans.com and Ameriloan.com,” says Alison Southwick with the Council of Better Business Bureaus. All of these companies have an “F” rating with the BBB.

These sites are easy to use. You just type in your personal information, including bank account and Social Security number (that’s a risky thing to do) and before you know it the loan is deposited to your account. After that, things can go downhill quickly.

“Most of the people we heard from thought they were signing up for a quick and easy one time loan – typically a few hundred dollars – that they thought they would pay back in about two weeks,” Southwick explains. “But that didn’t happen. Complainants say all of their subsequent payments went to cover recurring finance charges and not toward the principal.”

Lori McDonald, a single mom in Boston, realizes she made a big mistake when she used an online payday loan company to get some quick cash.

“It nearly ruined my life,” she tells me.

McDonald borrowed $400 and gave the company her checking account number for automatic withdrawals. The interest charge would be $120 after two weeks. By law, the interest on payday loans in Massachusetts is capped at 23 percent APR. McDonald was getting socked for an effective annual interest rate of around 800 percent!

McDonald could not afford to pay back the loan and the interest, so she just paid the interest. After three months she had spent $720 and still owed the $400 principal. Falling deeper and deeper into debt, McDonald told the loan company to stop making withdrawals from her account.

But the company didn’t stop, until the bank closed her checking account.

Then the payday loan company demanded a lump sum payment of $1,150. Unable and unwilling to pay such an exorbitant amount, she told the loan company to leave her alone and she filed complaints.

“Both payday loan storefronts and payday loan Web sites are offering a product we think is very destructive to families,” says Leslie Parrish with the Center for Responsible Lending. “But when people take out an online payday loan they’re adding another layer of risk to an already bad product.”

West Virginia goes after the bad apples
West Virginia Attorney General Darrel McGraw has sued dozens of predatory online payday lenders. He calls these companies “loan sharks” because of how they try to skirt his state’s consumer protection laws.

McGraw says Internet payday lenders typically charge from 600 to 800 percent APR – 45 times greater than the 18 percent APR allowed in West Virginia.

Many of these companies are based in other states that don’t have usury laws. By making these loans over the Internet, they claim they can charge whatever interest rate they want.

Some are located in other countries. They have a P.O. Box or use a mail service to have an address in the U.S. It’s often difficult – sometimes impossible – for law enforcement officials to track down the people running these foreign operations. So if a customer has a complaint, there may be no way to help them.

A bad deal any way you slice it
For someone with poor credit and no savings, a payday loan seems like the perfect solution to a short-term cash flow problem. But all too often these “no credit check required” loans have long-term negative consequences.

“How is a family that is already living paycheck to paycheck and has a financial shortfall going to come up with $300 or more from one paycheck to pay back their payday loan?” asks Leslie Parrish with the Center for Responsible Lending. “For many people that’s simply impossible to do and keep up with all their other obligations.”

June Norton of Worcester, Mass., got burned by a payday loan Web site. She wants to warn others not to fall into the same trap.

“Don’t borrow money this way. Don’t even think about it,” she says. “Talk to your friends, talk to your family or see if your employer has some sort of employee assistance program for short-term loans. Exhaust every other avenue and don’t even think about trying one of these payday loan companies because they are just not worth the aggravation, heartache and hassle.”

Remember: Unlike brick-and-mortar payday loan stores, online payday lenders are virtually unregulated. I find that scary.

The Better Business Bureau says there are “reputable” online payday lenders; such as the ones run by the people who have stores in your neighborhood. Unless you’re dealing with a familiar name there is no way for you to know if that site is legitimate. You could be giving your bank account number to a dishonest operator, or worse yet – an identity thief. That’s a real danger.

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