Beware Payday Loan Scams
Out of cash before the end of the month? A payday loan can help! Just fill out the quick and easy application and the money you’ll receive in your next paycheck can be yours without the wait–with a moderate interest charge, of course.
While payday loans can be legit, unfortunately, there are many scammers masquerading as payday lenders seeking to trap the cash-strapped borrower in a nightmare that never ends. Here’s what you need to know about payday loan scams and how to avoid them.
Payday loan scams
Payday loan scams can come in several forms. Here are some of the more common varieties:
1. Phantom payday loan scams
In a phantom payday loan scam, a scammer contacts you claiming that you owe money on a payday loan you never sought. They’ll demand immediate payment, using aggressive tactics like threatening legal action, wage garnishment or even arrest. They’ll use personal information they gathered on you through data breaches or phishing to convince you that their claim is legitimate. The scammer will insist on payment via wire transfer, gift card or prepaid debit card. Of course, once these payments are issued, they’re nearly impossible to reverse.
Tip: If you’re asked to pay back a loan you never took out, you’re not losing your mind—you’re being targeted by a scammer.
2. Upfront payment scams
In this type of scam, a fraudulent lender promises to give you a payday loan, but asks for upfront payment in the form of fees or collateral before agreeing to release the funds. These fees are often described as “processing” or “insurance” fees. Once the scammer receives their payment, they disappear, and you never receive the promised loan.
Tip: Legitimate payday lenders may charge fees, but they will never require payment before issuing the loan. If a lender insists on upfront fees, it’s a major red flag.
3. Loan renewal/rollover scams
Payday loan rollover scams involve lenders offering you the option to “roll over” or extend an existing payday loan if you can’t pay it back by the original due date. While this may seem helpful, these extensions come with additional fees and interest that quickly accumulate. Scammers exploit this by trapping you in a cycle of never-ending debt where you are continually paying fees and interest without ever reducing the principal loan amount.
These types of scams target vulnerable borrowers who may already be struggling financially, causing them to owe far more than they initially borrowed.
Tip: Not every scam involves blatant dishonesty. Some scams are simply misleading and aggressive ruses that ensnare you in a deal in which you didn’t quite know what you are getting yourself into.
4. Bogus payday loan services
Some payday loan scams involve fake companies that appear legitimate but are set up solely to steal your personal and financial information. These bogus companies often have professional-looking websites, official-sounding names and even fake customer reviews. However, once you apply for a loan, they use your information for identity theft or to access your checking account. These scammers may even offer loans that seem too good to be true—like extremely low interest rates for payday loans, which is highly unusual.
Tip: Never share your personal information, like your Social Security number, checking account details or credit card information with unsolicited contacts.
Protect yourself
Don’t get caught in a payday loan scam! Protect yourself with these tips:
- Research the lender. Before applying for a payday loan, thoroughly research the lender. Look for official state licensing, as well as reviews from previous customers. You can also check with consumer protection agencies, like the Better Business Bureau (BBB) or Consumer Financial Protection Bureau (CFPB), to see if any complaints have been filed against them.
- Avoid upfront fees. Legitimate payday lenders do not require upfront payments. Be highly suspicious of any lender asking for an advance fee to process, insure or secure a loan. These requests are almost always scams.
- Be wary of unsolicited offers. Scammers often contact potential victims through unsolicited emails, phone calls or text messages. If you are approached by a lender offering a payday loan without you applying for one, be super-cautious. Legitimate lenders will not offer you a loan unless you have initiated contact.
- Understand the terms. One of the most effective ways to avoid falling victim to a payday loan scam is to fully understand the terms of the loan before signing anything. Read the fine print carefully, and make sure you are aware of all fees, interest rates and payment schedules. Be cautious of lenders that pressure you into signing a contract without allowing time for review.
- Check for a physical address. Legitimate lenders typically provide a physical address on their websites and/or communications. If you can’t find an address or the lender refuses to disclose it, this is a huge red flag.
It’s not easy when you have more month than money, but getting caught in a payday loan scam will only make your money troubles worse. Use these tips to avoid getting scammed and stay safe!