Warning on Internet loans

NEW YORK (CNN/Money) - The Consumer Federation of America has warned borrowers about the costs and risks of using Internet payday loan sites that make relatively small loans to consumers for short periods of time.

The non-profit association said Tuesday the loans typically cost $25 per $100 borrowed and must be repaid or refinanced by the borrower's next payday. That cost for a two-week loan works out to 650 percent annual interest rate (APR). But the consumer group says only 38 sites out of 100 surveyed disclosed the annual interest rates for loans prior to customers completing the application process. The most frequently posted APR was 652 percent, followed by 780 percent.

The group said that charges ranged from $10 per $100 borrowed up to $30 per $100 borrowed. Loan amounts generally range between $200 to $2,500, with $500 the most frequently offered.

The consumer group also warns that although loans are due on the borrower's next payday, many surveyed sites automatically renew the loan, withdrawing only the finance charge from the borrower's bank account and extending the loan for another pay cycle at the same high interest rate. Sixty-five of the surveyed sites permit loan renewals with no reduction in principal. At some lenders, consumers have to take additional steps to actually repay the loan, the group warned.

The group cautioned that the Internet payday lenders also demand contract terms from borrowers that the association considers unfair to consumers, including agreements not to participate in class action lawsuits, and agreements not to file for bankruptcy. Some lenders require applicants to agree to keep their bank accounts open until loans are repaid. Others ask for "voluntary" wage assignments even in states where wage assignments are not legal.

"Internet payday loans are dangerous for cash-strapped consumers," said a statement from Jean Ann Fox, the group's director of consumer protection. "They combine the high costs and collection risks of check-based payday loans with security risks of sending bank account numbers and Social Security Numbers over web links to unknown lenders."

Source: CNN MONEY