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Borrowing cash online is wire act with no net

HELEN HUNTLEY
Published August 8, 2004

Need some fast cash? The Internet is loaded with companies eager to provide it. They advertise small short-term loans - usually up to $500 - with fast approval and overnight electronic delivery of the cash to your bank account. Bad credit? No problem.

But you'd better be the gambling type. Taking out a loan over the Internet could be even more dangerous to your financial health than borrowing money at the check cashing place down the block - and that's saying a lot.

Payday lending is a $25-billion-a-year industry notorious for its high interest rates: Think 400 percent and up. The concept is quick cash to tide you over until payday a week or two away. Lenders defend their rates as a reasonable alternative to banks' bad check fees.

States have cracked down on the industry's worst tactics. In Florida, it is illegal to roll over a payday loan when it comes due, a practice that can trap consumers into paying hundreds or even thousands of dollars in interest without ever reducing the principal. But rollovers are easy on the Internet, where regulation is scarce.

Type "payday loan" or "cash advance" into any search engine and up pop dozens of links. However, many of the Web sites are less than forthcoming. Often the company's address is nowhere to be found, although there may be a reference to the laws of Utah or Grenada, offering a clue.

Some online lenders don't reveal their fees until after you've entered your personal information. Others provide a table so you can look up the annual percentage rate. Would you believe 1,825 percent for a four-day loan?

Typically the online companies charge more than Florida law allows. The state limits payday lenders to a maximum fee of 10 percent of the amount of the loan plus $5.

Florida law also has other protections for consumers who deal with in-state payday lenders. A Floridian who can't repay a payday loan when it comes due can get an interest-free extension by signing up for a repayment plan with an approved credit counseling agency. Credit counselors say online lenders refuse to go along with those terms.

Perhaps the biggest risk of dealing with Internet lenders is the potential for identity theft. Borrowers are asked to provide Social Security numbers, bank statements, payroll stubs, canceled checks and photo IDs.

Don't count on regulators to police the Internet, said Christopher Peterson, a University of Florida law professor and author of Taming the Sharks: Towards a Cure for the High Cost Credit Market.

"For state governments to effectively regulate Internet payday lenders is extremely challenging," he said. "It's not really on the radar screen for most legislators and courts."

The only good news is that low-income consumers who have the most difficulty with payday loans are less likely to have Internet access.

Q. My new employer does not enroll employees in the 401(k) until they work for a year. I don't wish to lose a year's worth of investing and would like to continue putting funds in the IRA I rolled my old 401(k) into. These funds would come from my bank account and have been taxed already. How is this offset at tax time?

You may be eligible to deduct your IRA contribution. If you do, the money will be taxed when withdrawn. If you make a nondeductible contribution to this IRA, future withdrawals will be partly taxable and partly tax-free. (Keep track of nondeductible contributions with Form 8606.) An alternative is to contribute to a separate Roth IRA. Roth contributions are not deductible, but qualified withdrawals are tax-free.

Eligibility for an IRA deduction is based on your income and whether you or a spouse were covered by a retirement plan during the year.

Note to readers: Did you request an extension for filing your income tax return in April? About 8.5-million people did, and if you were one of them, Aug. 16 is the deadline for filing your return. If you can't make it, file Form 2688 requesting an additional two-month extension. However, you'll need a good reason, since approval is not automatic as it was four months ago.

Helen Huntley writes about investing and markets for the Times. If you have a question about investments or personal finance, send it to On Money. We'll try to answer those we think are of greatest reader interest. All questions must be submitted in writing, but readers' names will not be published. Send questions to huntley@sptimes.com or Helen Huntley, Times, P.O. Box 1121, St. Petersburg, FL 33731.

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