Internet Payday Loans

anks and smaller financial institutions have been accused of becoming involved in Internet payday loans, short-term loans offered over the Internet that carry high interest rates. Although the banks themselves do not offer Internet loans, they may be allowing companies that do offer the loans to engage in predatory online loan activity, possibly in violation of consumer protection laws. Meanwhile, some Internet payday loan companies are accused of either operating in states where they are illegal or operating in states in which they do not have the proper licenses. Others are accused of charging interest at rates far higher than state laws allow.

Internet payday loans are illegal in some, but not all, states. Customers can apply for the loan online—often with quick approval and no credit check—but the expectation is that the loan is paid back with the customer's next paycheck. In some cases, however, interest rates can be exorbitant, sometimes above 500 percent. Further, if the customer does not indicate he or she wants to pay back the entire loan, the lender might renew the loan to the next month, withdrawing the interest payment only. There may also be other finance charges and fees associated with the loan. Combined with the interest, the finance charges and fees could tack on thousands of dollars to what started as a relatively small loan.

Payday lending is either fully illegal or illegal without a proper license in Arizona, California, Ohio, Montana, Arkansas, New York, Pennsylvania, West Virginia, Georgia, New Hampshire, Vermont, Massachusetts, Connecticut, New Jersey, Maryland and the District of Columbia.

Because the payday loans are obtained online, however, lenders may be illegally lending money to customers in those states. Some states also cap interest rates, making it illegal to charge above a certain interest rate, which Internet payday loan companies may be violating.

According to a New York Times article (2/23/13), major banks including JPMorgan Chase, Bank of America and Wells Fargo may enable payday loan lenders access to borrowers' bank accounts in order to make withdrawals. So while the banks themselves do not provide the payday loans, they provide the means for the payday loan companies to do business.

Furthermore, companies that offer Internet payday loans might also automatically withdraw money from the customer's bank account, pushing the customer into overdraft and triggering overdraft and insufficient funds fees. In some cases, banks are alleged to have allowed these lenders to continue withdrawing money, even when the customer has asked them to stop, in violation of federal law. According to a Pew Payday Lending in America report, "How Borrowers Choose and Repay Payday Loans" (2/20/13), 27 percent of payday loan borrowers were forced into bank account overdrafts during 2012.

Officials are now investigating the role major banks play in online payday loans and whether the banks make it possible for such lenders to offer loans in states where they are illegal. Banks may be profiting off allegedly illegal activity if the automatic loan withdrawals push the customer into overdraft, resulting in bank fees being charged.

Even though major banks do not offer the loans themselves, if they allow Internet payday companies to withdraw money from customers' accounts, especially after the customer has requested they stop, the banks could be violating consumer protection laws.

Meanwhile, regulators and attorneys are investigating Internet payday loan companies as well, to determine if they use illegal, misleading or unethical practices.


Some Internet payday loan lawsuits have been filed against companies alleged to have violated consumer protection laws. In 2010, one such lawsuit against Arrowhead Investments was settled, with the company agreeing to pay $100,000 in restitution and forgiving an additional $432,000 in outstanding loans. The lawsuit alleged Arrowhead violated state consumer law and had unreasonable loan agreements. Arrowhead did not admit to any wrongdoing in the settlement.

Consumers who live in states where payday lending is illegal may be eligible to file a lawsuit against the lender. Customers who have requested their banks stop the automatic withdrawals but have still had the money withdrawn from their accounts may also be eligible to file a lawsuit.

Although there are concerns about the high interest rates and fees associated with the loans, another concern about the Internet payday loans is that because they are offered online, they are available to consumers in states where such loans are illegal or where the company may not be properly licensed.

States in which Internet lending is illegal or in which companies must be properly licensed are Arizona, California, Ohio, Montana, Arkansas, New York, Pennsylvania, West Virginia, Georgia, New Hampshire, Vermont, Massachusetts, Connecticut, New Jersey, Maryland and the District of Columbia.

Internet Payday Loans Legal Help

If you or a loved one has suffered similar losses from an Internet Payday Loan, please click the link below and your complaint will be sent to a Consumer Fraud lawyer who may evaluate your claim at no cost or obligation.
Last updated on May-7-15