Published: July 2007

Utility customers prime target for predatory loans

Utility customers who pay their bills at the storefronts of ultra-high cost payday lenders are typically the most financially vulnerable targets for predatory loans.

Utility customers who pay their bills at the storefronts of ultra-high cost payday lenders are typically the most financially vulnerable targets for predatory loans, according to a report titled Utilities and Payday Lenders: Convenient Payments, Killer Loans by the National Consumer Law Center (NCLC).

Paying routine monthly bills for electricity, natural gas or telephone service are among the most familiar and unavoidable transactions.  Although payment is usually made by mail or online, many consumers still prefer - or need - to pay their bills in person.  According to NCLC’s report, nearly one in four utility bills are paid in person.  The demand for this payment method is strongest among low-income, minority and female customers.

To satisfy this demand, utilities arrange to accept payment through third parties, including payday lenders.  Yet a fee isn’t the biggest problem a utility customer may encounter when paying a bill at a payday lender, says NCLC.  Each transaction has the potential to introduce that customer to a seller anxious to entice them into a high-cost, short-term loan that could easily transform into a long-term debt.

Although payday lenders offer convenience and accessibility, NCLC reports, they come with a catch: interest rates that are high enough to shame a loan shark.  Fees charged by lenders translate into annual interest rates ranging from 390 to 780 percent or higher.  Transactions are structured to trap customers in a cycle of lingering debt and recurring fees, where borrowers repeatedly roll over, or trade in, an existing short-term loan for a new one.  Borrowers fork over mounds of cash to pay astronomical fees, while the principal of their debt remains untouched.

“The unwanted side effects of a payday loan can include bounced checks, bank and payday lender penalty fees, lost check-writing privileges, lowered credit ratings and exposure to heavy handed and abusive debt collectors,” says Jean Ann Fox, director of consumer protection for the Consumer Federation of America.

The National Consumer Law Center urges utility regulators to ensure that customers are not directed to high-cost lenders to pay bills for heat, light or telephone service.  It also recommends financial regulators ensure that payday and other ultra-high-cost lenders don’t use bill payment services to market predatory loans.  Finally, it asks utility companies to work with customers so that they do not resort to using predatory payday loans to come up with the money to pay bills.

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