Beware—Some Payday Loans Are Scams!
Payday loans—also called cash advance loans, check advance loans, deferred deposit loans, and post-dated check loans—are short-term, high-interest loans in amounts of $100 to $1,000 from a payday lender’s store, online, or even some banks. Due to their high interest rates—upwards of 300 percent APR (annual percentage rate)—payday loans are illegal in some states.
What’s illegal in all states are payday lending scams. While there are financially healthier solutions to meet an unexpected need for cash—like a personal loan from a credit union or negotiating your bills—if you do use a payday lender, here’s what you need to know to avoid becoming a victim of a scam.
Three payday loan scams
Upfront fees, undisclosed fees, and reverse transactions. A common payday loan scam requires you to pay an upfront fee—usually sent as a wire transfer, money order, gift card, or other form of money payment—that will be nearly impossible to get back. Once you pay this fee, the fraudulent company will refuse to give you the loan and will disappear (usually by shutting down their website). Another version of this scam is to charge fees that weren’t listed in the fine print of the loan paperwork. A legitimate lender will only charge any one-time fee after you’ve received the funds, and the fee should be clearly outlined in the paperwork.
Fake lending companies may try to reverse transactions on your banking account once you give them that information. They’ll try to have the most recent payments made from the account—like rent, cell phone bill, insurance, and/or utilities payments—put back into the account, and then they’ll withdraw the money.
Payday loan application. There are scams that trick you into thinking you owe money when you don’t. It starts when you fill out an online application for a payday loan, hit “Submit,” but never sign a contract to take on the loan. Now that the scammers have some of your personal information, they call you and pretend you owe them money for the loan, sometimes months after you filled out the application.
Another version involves a scammer calling and claiming to be a debt collector. These callers will be aggressive and often threaten legal action or arrest if you don’t pay immediately. They may have some of your personal information to convince you of their legitimacy, but all this means is that another company sold your information, and this company is trying to use it to scam you. If you receive one of these calls, hang up immediately and call your financial institution or credit card companies to see if the claim is legitimate.
Fake online form. Online forms asking for extensive account information is another way fake lenders can rob you of your money. They’ll advertise really good interest rates—but only for a limited-time, so act quick!—to get you to submit your information without slowing down to confirm they’re a legitimate lender. Once the unscrupulous website operators have your banking information, they’ll either withdraw as much money as possible or enroll you in a type of membership program that will withdraw money from your account every month.
Investigate any website claiming to be a payday lender by reading reviews or finding them on the Better Business Bureau website, and always read all of the fine print to understand the terms of their lending practices.
Spot a scam
Here’s how to spot telltale signs of a payday loan scam:
- Read the fine print. All of it. If you don’t understand something or find anything suspicious, ask questions. Don’t sign anything until you understand each line of the loan’s terms.
- Understand the interest rate. Reputable lenders must tell you a loan’s interest rate up front. Then you can calculate how much you’ll pay in interest and decide if you will be able to repay the loan.
- Don’t trust guaranteed offers. Legitimate lenders cannot guarantee a loan without seeing your full application.
- Look for any of these red flags on a payday lender’s website—if you see any of them, stop using the site immediately:
- Website lacks a working phone number or mailing address in the U.S.
- Website claims the company is based overseas
- Lender requires an upfront payment before you receive the loan
- Any payment is required via wire transfer
What to do if you suspect you’re a victim of a scam
If you have been a victim of a payday lending scam, there are steps you can take to lessen your financial loss and attempt to stop those responsible from hurting others.
- File a police report to legitimize your claim. You’ll need this paper trail to present to your financial institution and the credit bureaus before they can help repair your credit or recover funds.
- Contact your credit union. Tell them your account information may be compromised and to watch your account for unusual activity.
- Contact the Social Security Administration (SSA) if you’ve given out your Social Security information so they can help prevent identity theft.
- Contact the top three credit bureaus (Experian, TransUnion, Equifax) to put a freeze on your credit report.
- File a complaint with the FTC. This will help them track the fraudsters and prevent future scams.
- File a complaint with your State Attorney General, who can attempt to make a case against the scammers and make them answer to the law.