How to Spot Payday Loan Scams and How to Avoid Them
Scammers will threaten you with legal action if you don’t pay off payday loans they never gave you.
It’s not a good idea to take out a payday loan just to pay an unexpected payment. Because these short-term, high-interest loans may present an even bigger danger to your financial security in the long run, no matter how daunting that bill may appear. You might probably devise a better strategy to deal with sudden costs.
The truth is, though, even if you don’t take out a payday loan, you could still get scammed. That’s exactly right. Someone with access to your data could potentially attempt to collect on a loan that you did not apply for. Read this article to learn how not to be a victim of payday loan scams.
What Is a Payday Loan and How Does It Work?
People with bad credit and lower incomes are the typical debtors of payday loans, which are a type of no-credit-check loan.
Paycheck advances are small loans, normally for a few hundred bucks, that are made against the debtor’s next salary. The repayment date is normally the debtor’s next payday, hence the name. These loans are also known as “cash advances” for the same purpose.
These loans normally last for approximately two weeks, but the average annual percentage rate (APR) is around 400%. This is due to the fact that the typical cost of a two-week payday loan with a flat rate interest charge of 15% is 391%. A few dollars a week in fees can quickly mount up.
Why Are Payday Loans Risky?
Payday loans appear to be a short-term solution for individuals needing money until they get paid again. However, there are apparent and concealed risks associated with getting a Payday loan, which is normally authorized online following a very quick credit check.
Payday creditors don’t have to hide the fact that they charge exorbitant interest rates, so many people don’t see them as risky. However, most creditors in this industry will gloss over the true cost of their loans. If you don’t pay off the loan quickly, the interest you pay might be over a thousand percent.
A regular loan can charge somewhere around ten to forty percent, which is extremely high even when repaid in the allotted time (around two weeks for average salaries). Worse, the actual sum will change depending on the debtor’s creditworthiness. Debtors with low credit scores and precarious incomes may suffer more from this loan’s terms.
How Do Payday Loan Scams Work?
You don’t always go to the creditor’s website when registering for an online loan. You apply to a lead generator, which sells your data to creditors.
Even though you don’t get the payday loan you requested for, your application includes personal information along with the amount you wanted to borrow. Scammers can buy this record.
Scammers contact you to collect a bill you haven’t ever owed. They pose as payday loan agents. Perhaps they’ll state they’re a business lawyer since that is threatening. They might also pose as government officials.
Once on the line, the threats commence. These scammers will utilize low-down methods to extort you. They’ll rant and curse at you, threaten legal action, seize your earnings, or drain your account.
They’ll phone your family, and friends, and work to embarrass you into settling. They can also threaten arrest since they’ll do anything to get paid. It’s trying to blackmail someone who hasn’t done anything wrong.
How to Recognize Payday Loan Scams
Payday loan applicants should watch out for these six red flags to recognize payday loan scams:
- You have never applied for or obtained a payday loan. Scammers target people who haven’t finished a loan application or who have yet to be approved. If you haven’t finished your loan application or received a response, you’re speaking to a scammer.
- You’re threatened with arrest unless you pay. Scammers impersonate law enforcement to deceive victims. A respectable creditor won’t threaten arrest.
- The caller won’t reveal his collection agency. The caller should be able to identify a collecting agency by name. If they won’t, it’s likely a scam.
- You can’t find information on the caller’s agency. The caller sometimes names a fake agency. If you can’t find the company’s website, contact information, or physical address, hang up.
- You have not received a validation notice in the mail. By law, a debt collector must issue a validation letter to the debtor. This letter lets the debtor appeal the debt within thirty days. It lists the sum owed and to whom it must be repaid. If you haven’t gotten a letter before the supposed debt collector calls, it’s a scam.
- The caller only wants phone payments. If the caller were from a real collections agency, they’d figure out a payment arrangement with you and provide a mailing address. When a “collector” demands full payment over the line and declines to provide an address, you’re probably talking to a scammer who wants your financial data and cash.
What Should You Do If You Are a Payday Loan Scam Victim?
Even if you don’t have the resources to afford an attorney, you still have options for pursuing financial restitution.
The Federal Trade Commission (FTC) is an independent government organization with the purpose of preventing and punishing deceptive and unfair business activities. Tell the FTC what occurred via their fraud reporting page, and they will inform you of your options.
The Consumer Financial Protection Bureau (CFPB) was established to monitor the banking and lending industries to guarantee customers are treated fairly. If you’re having trouble with a payday creditor, you can report it on their special complaints website.
Last but not least, certain lawyers may represent you in a lawsuit against a payday creditor without charging you any fees if they believe you have a good chance of winning. Contacting a law firm in your area will help you find out if your case has a chance of succeeding.
If none of these options work, you can work with a credit counselor to develop a strategy to dig yourself out of the hole the scam has dug.
How to Avoid Payday Loan Scams for Good
As a first step, try to avoid getting a payday loan if you can. Alternatives that won’t break the bank exist.
- Options for Payday Loans. Credit unions provide a service that is similar to a payday loan but isn’t a payday loan: the Payday Alternative Loan (PAL). Comparable to payday loans, but with a maximum interest rate of 28%.
- Cash Advance Apps. Try a cash advance app instead of a payday loan service since they provide the same short-term cash you need quickly without the high-interest rates. These options are much more cost-effective than the payday loan companies that charge exorbitant interest rates. Two excellent choices are Dave and Earnin.
- Other Alternatives to Payday Loans. In addition to requesting a pay advance from your employer, applying for a personal loan, cash advance from your credit card, peer-to-peer lending, 401(k) loan, or calling your creditor to request a payment extension, you can look into a few other choices.
Bottom Line
If you absolutely need a payday loan, read over the terms and conditions thoroughly before signing anything.
Consequently, it is imperative that you promptly repay your loan. After paying off the loan, you should fix the underlying problems with your finances that necessitated the cash advance in the first place. Save all you can each week, even if it’s just a few dollars, to put toward a rainy-day fund in case of an emergency.
Finally, dedicate all of your attention to eliminating your debt. With some savings in the bank, you’ll be in a better position to evaluate any suspicious offers, which can help you avoid falling victim to payday loan scams.
