Trapped by Web loan with the 842% interest rate

FourScore

(1000+ posts) Send PM | Profile | Ignore

Sat May-10-08 05:06 PM
Original message

Trapped by Web loan with the 842% interest rate

I thought this sort of thing was illegal!!

Rochelle Parker needed money for Christmas gifts and medicine, so she went online and found a Web site promising easy money. After a few key punches she was zapped a $300 loan, but one that charged an astonishing 842 percent annual interest.

The recently retired fingerprint technician for the Chicago Police Department had several other online loans that drained her financially and forced her to move in with her daughter. But getting another loan was so easy on the Internet.

"As my mother said, I'm robbing Peter to pay Paul," Parker said with a shake of her head and a sigh of regret.

People like Parker are falling through one of the newest trapdoors in the cash-strapped economy—online payday loans. Such loans typically were the province of payday loan storefronts that cater mostly to the working poor and low-middle-income workers, short on cash until payday. Now online loans are spreading to the middle class as a result of rising gasoline and food prices, tightening credit, the subprime mortgage fallout and the ease of home computer access to the Web.

The cashed-out economy
"It's insane. It is growing like wildfire," said Henry Coffey, a Baltimore-based stock analyst who tracks the payday loan industry. One factor in the growth of online loans, which charge as much as 2,000 percent interest, is that they effectively hook borrowers into cycles of debt, often forcing people to take second and third loans to cover ballooning debts."If you are paying over 1,800 percent interest, you will never get out of that debt," said Elizabeth Schomburg, an official with Family Credit Managing Services, a Rockford-based credit counseling agency. Nonetheless, she said she has seen borrowers try to beat the odds and take out "three, five, six or eight loans."

With the sinking economy pinching consumers' wallets, analysts like Coffey consider the Internet loans a bright spot for investors, and he points to a company like Ft. Worth-based Cash America International Inc. It began offering online loans only two years ago, and last year those transactions accounted for nearly 60 percent of its loan revenues of $322.7 million. The company has an online operation in Illinois as well as 18 storefronts.

SNIP

John Van Alst, an attorney for the National Consumer Law Center in Washington, D.C., said lenders gain access to accounts by requesting from the bank a "remotely created check." That allows them draw money, even on closed accounts, he said.

Internet loans often cost $30 for each $100 borrowed, Fox said, and the high numbers quickly add up, even without additional fees. To cite one example, a payday loan for $182.68 at 573.57 percent will cost someone $557.58 a month later. The money is promptly electronically drafted from the customer's checking account.

http://www.chicagotribune.com/business/chi-sun-payday-loans-may11,0,6075560.story?track=rss