Sara Routhier, Managing Editor and Outreach Director, has professional experience as an educator, SEO specialist, and content marketer. She has over five years of experience in the insurance industry. As a researcher, data nerd, writer, and editor she strives to curate educational, enlightening articles that provide you with the must-know facts and best-kept secrets within the overwhelming world o...

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Joel Ohman is the CEO of a private equity-backed digital media company. He is a CERTIFIED FINANCIAL PLANNER™, author, angel investor, and serial entrepreneur who loves creating new things, whether books or businesses. He has also previously served as the founder and resident CFP® of a national insurance agency, Real Time Health Quotes. He also has an MBA from the University of South Florida. ...

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Reviewed by Joel Ohman
Founder, CFP® Joel Ohman

UPDATED: Aug 17, 2012

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California financial regulators announced several warnings this week regarding the proliferation of illegal online payday loan lenders offering their services to state citizens.

The consumer alert, which appeared on the California Department of Corporations’ (CDC’s) website, said that many of these lenders who offer bad or no credit payday loans fail to include the annual percentage rate (APR) of the financing they offer. APR is used as a standard measure of a loan’s true cost, and an APR figure is required to be blatantly visible on all lending offers, payday loans included.

Additionally, it warned of an increase in harassing debt collection practices.

“Unlicensed payday lenders are becoming more aggressive in their collection techniques,” said Corporations Commissioner Jan Lynn Owen in the alert. “We’ve heard of payday lenders hiring collection agencies and contacting employers and threatening to report to credit agencies. The department is taking action to shut down illegal lenders and protect consumers whenever we discover the violations.”

So far, nine payday lending companies have been targeted by the CDC:

  • Northway Financial Corporation, Malta
  • St. Armands Services, Florida
  • TIOR Capital, California and Nevada
  • Camosun Financial, Canada
  • United Consumer Financial, Utah
  • Discount, St. Lucia and Canada
  • VIP PDL Service, Nevis
  • A-1 Premium Budget, Delaware
  • Vandelier Group LLC, Missouri

Payday loans, also called short-term loans, no credit loans or cash advances, are used by borrowers who need money quickly. These financing options have very relaxed requirements, as virtually anybody with a checking account and a steady income can qualify. It’s precisely due to this financial availability and ease of access that industry advocates claim these no credit payday loans need to exist. But industry opponents claim these products are predatory at best, financially lethal at worst.

California law currently limits a single cash advance’s interest rate to 15 percent. However, that’s only a 2-week interest rate. If stretched out and expressed on the same timeline as most other loans’ interest rates, that 2-week, 15 percent restriction permits payday loans to be offered at an APR of 390 percent.

Compare that to the average APR of 30-year fixed mortgages, which currently hovers around 3.5 percent.

Industry supporters, however, argue that APR shouldn’t be used to judge their products. Their claim rests on the fact that no credit payday loans are designed to be short-term and repaid quickly. Since they’re not meant to be stretched out for a full year, APR shouldn’t be the unit of measurement used for this type of borrowing.

For all of their downfalls though, most do agree that there is a place for bad credit financing in our society.

“We understand that there is demand for small-value loans from many consumers,” said the Consumer Financial Protection Bureau (CFPB) on their website. “But we want to make sure that consumers understand the consequences of their decisions and are protected from risks that may be inherent in these products.”