Even if you've never taken out payday loans or have always dealt with legit lenders only, you can still face a scam. This is because a scammer can get ahold of your personal and financial information and force you to pay for a loan you've never borrowed. Let's talk about the main signs of payday loan scams and find out how you can avoid them.
What Are Payday Loans?
A payday loan, also known as a cash advance loan, is a short-term, high-interest debt that must be repaid by a borrower's next paycheck. Payday loans are usually used by people who need money fast and have credit issues. These two factors make it challenging for them to seek traditional bank loans.
Payday loan options always come with small amounts and high costs. Depending on the state, borrowers can access between $100 and $1,000 and repay the funds in 2 to 4 weeks. Payday loan interest rates are several times higher than those on conventional loans. An annual percentage rate is usually a three-digit number, making a cash advance loan difficult to manage.
Is a Payday Loan a Scam?
A payday loan itself is not a scam, even though it's an expensive borrowing option. Although a bank or credit union may offer customers more favorable terms, they are not available to everyone due to strict eligibility criteria. That's the moment when payday lenders come to the rescue. They have relaxed requirements and provide underbanked borrowers with pretty fast financial assistance. By setting higher rates, they offset potential risks associated with bad credit and defaults.
If you deal with a licensed lender that operates under the state lending law, a payday loan is more likely to be a safe option. However, a borrower also faces responsibility. Payday loans should be used cautiously. You also need to have a clear repayment plan without rolling the loan over or getting another debt to cover the previous one.
However, it's hard to say how ethical payday loan practice is. Some states, for example, Texas, have fewer restrictions, so borrowers can get into a long-term debt cycle. Additionally, a payday loan can become a scamming tool as it's typically an option for vulnerable individuals. Payday loan scams target people who need money desperately and are usually limited in options. Therefore, it's much easier to mislead them.
Types of Payday Loan Scams
There are three most common types of scams used by fake payday lenders or collectors.
Fake Check or Deposit Scams
This popular scam strategy is about getting your personal information and sending you a fake check or a deposit on a platform like Venmo, CashApp, or Zelle. Then a scammer will ask you to send this amount back as it was deposited by mistake. This is how it works: you transfer the amount to a scammer and then find out that the initial deposit was never made or no good. A check will bounce after a couple of days, while remotely deposited funds will show up as "pending" and never clear.
Upfront Fee Scams
An advance fee loan scam is when a lender asks you to pay something before you get a loan. They usually disguise it under origination fees for processing your loan request. But keep in mind that in most cases, processing fees are deducted from your loan amount after you get approved. Thus, you don't need to pay anything out of pocket. Although a legitimate payday loan company can also charge application or origination fees upfront, it will never guarantee you a loan.
Fake Debt Collection Scams
Fake debt collectors typically call those who have applied for a payday loan but didn't accept offers or get the funds. However, they can also call those who really have an unpaid debt. Scammers usually contact individuals and say that they owe them money and must repay it immediately. As are regulated by federal law, they are obliged to stick to fair debt collection practices. Thus, there are a few ways to determine whether a debt collector is legitimate.
Red Flags: Features of a Payday Loan Scam
Forewarned is forearmed. Below are some criteria that can indicate that the person you communicate with is trying to deceive you.
You've Never Used Payday Loans But Receive Debt Collector Calls
This may happen if you ever complete a payday loan application form through an illegitimate payday loan company. Once it gets your personal information, it sells it to fraudsters. Then, you receive calls from people who pose as lenders or debt collectors and ask you to repay the amount you owe. As you can guess, if you've never borrowed money from payday lenders, it's a 100% scam.
Emails Come from Generic Service Providers
Scammers often use email addresses from generic service providers, such as Gmail, Hotmail, or Yahoo. Legitimate companies typically have their own domains to go along with their email accounts. Thus, if you see an account that doesn't correspond to the company's domain name, it can indicate a scam. We recommend you not open emails that you don't trust. Phishing emails often result in financial fraud.
Spelling or Grammar Errors
Scam emails often contain various spelling and grammar errors. This is made to work around spam filters so the letter will be able to reach your email inbox. A scam email may also contain random words or look like it was generated.
Suspicious Payment Methods
Fraudsters often choose payment methods that make it very difficult to get the money back. If a lender asks you to pay via apps like Venmo, use a transfer service, for example, Western Union, or pay via gift cards, beware.
You're Asked to Pay Upfront
Although this is not a 100% indicator, many scammers use this method, so it's better to avoid the companies that charge application fees. This is because you never have a guarantee that you'll be approved, even if a lender asserts otherwise. Thus, you can be left with nothing.
Advertising Limited-Time Offers
Time pressure is another strategy that scammers use in order not to give you time to find more information about the company they are allegedly calling from. Scammers may try to convince you that you should act quickly. When you have no time to think or analyze their offer, you're more likely to make a financial decision that is bad for you but beneficial for a scammer.
This is a common feature of fake or unfair debt collectors. They can use pressure and threats to get money out of you. The most common threats include wage garnishment, Social Security payment suspension, or placing in a blacklist for banks and employers. Remember that such practices are prohibited, and lenders or debt collectors don't have the legal authority to do this. Scammers are only trying to scare you and make you act imprudently. Hang up immediately if the collector starts to threaten you.
Sound Promises and Guarantees
Scammers often advertise what people want to see in order to make their offers exceptional and desirable. For example, they can guarantee you approval even if you don't have any source of stable income or you already default on a loan. However, the only reason why a lender doesn't care about your financial situation is because they are not going to give you money. Therefore, they don't expect to get it back.
A legitimate lender will not mislead you by providing 100% approval guarantees or no screenings and verifications. Any credible lender needs to ensure you're a responsible borrower who can repay the money back. That is why instant funding, no credit checks, guaranteed approval, and other sound promises are often a sign of fraud. By doing this, lenders want to get your attention and lull you into a false sense of security to get your information or money.
No Licensed Payday Lenders
If a payday lender is not licensed, it's always a risk. You need to always ask for proof to make sure you deal with a loan provider with a recognizable permit or license.
Ways to Protect Yourself from a Payday Loan Scam
Here are a few ways that will help you avoid payday loan scams.
Never Provide Your Personal and Bank Account Information by Phone
Legal companies never ask to provide any sensitive information through the phone or via email. Additionally, you should know what data legitimate lenders may need and what they will never ask you for.
Legitimate lenders may need: name, mailing and residential address, contact info (cell phone number, email), Social Security number, income confirmation, employer details, checking account number, and routing number.
Lenders DON'T ask: log-in information, your credit card number, expiration date, and CVC/CVV number.
Don't Make Any Returns
If an individual or a company sends you a check or a deposit, don't make a return. In most cases, it's a fake, so it will result in losing money. Some scammers may also state that they make a deposit to ensure your bank account is active. However, such checks don't require you to make a return. The deposit amount is typically $1, and it will disappear automatically.
Don't Accept Phone Call Offers
If a company calls you with an offer, be on the alert. Lenders are not the ones who initiate a loan offer. A customer is usually the one who turns to the lender first. Therefore, you need to be suspicious of such representatives.
Avoid Paying Upfront
Most lenders charge fees by deducting their amounts from your loan proceeds. Therefore, you don't need to pay anything before you get the funds from a lender. Remember that paying fees never guarantees you loan approval.
Request a Debt Validation Note
If you get a call from a debt collector, but you're not sure whether it's a scam, ask it to send you a debt validation note. If the debt collector is legitimate, it's obliged to do this under the Fair Debt Collection Practices Act.
What to Do If You Become a Victim of a Payday Loan Call Scam?
If you think that you've been scammed, here are some actions you should take:
- Freeze your bank account. Contact your bank or credit union and ask it to close or freeze your account. Then, you can open a new one or ask your institution to change its number.
- Reissue the card. Contact your credit card company and report your card was stolen. The issuer will block it immediately and issue a new one linked to a different account.
- Freeze your credit. Thanks to this, scammers won't be able to issue new credit in your name. Freezing is possible through major credit bureaus, so contact one of them.
If you already lose money, it may sometimes be possible to turn it back. Below is the list of authorities that can help you with this:
- Federal Trade Commission (FTC);
- The Consumer Financial Protection Bureau (CFPB);
- Local law firms and attorneys;
- Local law enforcement.
Payday loan scams can affect even those who have never obtained payday loans. Although these high-interest loans are not scams themselves, they can be a fraud tool. Therefore, you need to learn more about potential threats and signs that can help you indicate them. We recommend you partner with trusted financial institutions only and make sure they use modern security services to protect your information from third parties.