Wayne Coons felt a sense of panic when he realized that the $350 payday loan he got over the Internet was costing him hundreds of dollars more than he thought.
Having borrowed from a storefront payday lender once, Coons thought online loans worked the same way. The man from Puyallup, Wash., expected the lender, Ameriloan, to deduct $457 from his bank account on his next payday to pay off the loan.
But when Coons checked his account two weeks after getting the loan last February, he was shocked to discover that Ameriloan had withdrawn only $105 and that he still owed $450 on his $350 loan. Coons, like many borrowers, had not carefully read the fine print. In fact, Ameriloan was allowed to “renew” the loan every two weeks, withdrawing $105 several more times without a penny of it reducing Coons debt. In all, the $350 loan could cost Coons more than $1,000.
Coons was fortunate. He quickly got in touch with the state Department of Financial Institutions and was told that Ameriloan is not licensed in the state of Washington to make payday loans.
As a result, Ameriloan could not make Coons pay back the loan. He closed his bank account and is off the hook.
“It’s illegal to make a loan without a license,” explained Deborah Bortner, the department’s director of consumer services. “If you’re not licensed, it (the loan) is not collectable and it’s not enforceable.”
The dirty little secret among online payday lenders who violate state laws is that they cannot win in state court, regulators say. Indeed, Bortner said she’s never seen a case where an online payday lender took a borrower to court.
Regulators in some states that license payday lenders routinely advise borrowers to follow Coons’ example. Check with state authorities to see if the loan is illegal, and if it is, close your account.
“If someone makes you a loan that’s illegal, either because they don’t have a license or they violate usury laws, you’re not under any obligation to pay it back,” said Norman Googel, an assistant attorney general in West Virginia.
Googel advises all borrowers who might be tempted to get a payday loan online, “Just don’t do it.”
Rick Brinkley, the head for Better Business Bureau of Eastern Oklahoma, agreed. He’s heard from more than 2,000 consumers who were caught off guard by the terms of online payday loans. When they can’t keep up with the payments, Brinkley said, “They’ve just entered a new world of hell that they weren’t prepared for.”
One problem is that many online payday lenders claim that state laws don’t apply to them. Some lenders say they are beyond the law because they’re based offshore. Others claim to be owned by Indian tribes, giving them the cloak of tribal sovereign immunity. Still others hide their ownership behind an impenetrable curtain of shell companies.
That means that some online payday lenders make loans even in 18 states that essentially ban the practice.