If you’re desperately short on cash, you might be thinking about applying for a payday loan. However, you might also be aware of payday loan scams. It’s important to know what to watch out for and how to find a legitimate lender to ensure you don’t get caught out.
Not all payday loans are scams — legitimate lenders will extend credit to those in need.
However, payday loans can be extremely expensive, and this is why they’ve acquired a bad reputation over the years. You can potentially pay up to £24 in interest when borrowing £100 for 30 days, which calculates to a four-figure APR.
Payday loans are also notorious for trapping consumers in endless debt. Because these loans are so expensive, borrowers often have trouble paying them off, which can prompt them to take out more payday loans to pay off their debts.
But while this doesn’t technically make them a scam, there are plenty of payday scam companies out there. To protect yourself, know what to watch out for.
Warning: Late repayment can cause you serious money problems. For help, go to moneyhelper.org.uk.
Please note: High-cost short-term credit is unsuitable for sustained borrowing over long periods and would be expensive as a means of longer-term borrowing.
Like many financial industries, the payday loan industry has scammers that prey on desperate people. Most scams revolve around consumers unwittingly giving out sensitive information or sending money to unscrupulous individuals.
Here are 3 payday loan scams and how to avoid them:
A scammer posing as a lender will guarantee you a loan if you pay an upfront fee first. The company might ask for the money to be sent as a wire transfer, money order, gift card or some other form that’ll be hard for you to get back once sent. After the company receives the upfront fee, they’ll disappear without giving you the loan they promised.
How to avoid: Don’t give any money to a lender to get a loan. Legitimate lenders do not charge fees before you’re approved. Any one-time fees for establishing the loan should only be charged after you’re approved and have received your funds. Also, be wary of guaranteed offers. A legitimate lender cannot guarantee a loan without seeing your full application.
In some scams, you’re asked to fill out an online form to receive a payday loan. After you’ve entered your bank account information, the website operators won’t actually extend a loan to you. Instead, they’ll enroll you into some type of membership program that takes money from your bank account.
How to avoid: Thoroughly vet any payday loan website you’re thinking about using. And read all of the fine print to make sure you understand it.
In this scam, someone phones you claiming to be a debt collector. They may threaten you with legal action or arrest if you don’t pay. The caller may also have your personal details, including your bank account number. Having this information doesn’t mean the call is legitimate. More likely, it means that someone else sold your information to a third party.
How to avoid: Don’t give out any personal information over unsolicited calls, and don’t send money to anybody claiming to be a payday loan collector. If you currently have a loan, call your lender directly to verify the repayment terms.
Payday loans tend to be popular with people desperate for cash and with poor credit due to past financial problems. It’s quick and easy to get approved for a payday loan, and the promise of fast cash can make applicants an easy target for scammers – if you need money quickly, it’s easy to forget to do your due diligence first.
What’s more, as many applicants will already be in debt, it can be easy to hand over funds when a bogus debt collector is harassing you.
There are a number of warning signs that can help you spot a payday loan scam. For example:
One of the biggest signs that your details have been stolen is unusual activity on your bank account statements. If you spot any unfamiliar transactions, whether for payments or cash withdrawals, alert your bank immediately.
It’s also sensible to check your credit report regularly. You can do this for free, and it enables you to see whether anyone has tried to take out credit in your name (you’ll see a list of credit searches on your report) and whether they were successful. If they were, there will be a new debt in your name. You’ll need to speak to the relevant lender if this is the case.
Another sign to be aware of is surprise packages being delivered to your home – this could suggest someone is using your details to pay for goods and services but failed to intercept the goods before they arrived. You might also receive letters from solicitors or debt collectors asking for a debt (that isn’t actually yours) to be repaid.
Those who need cash quickly and can’t borrow through more traditional methods, such as a personal loan or credit card, due to their credit history, are more likely to be susceptible to a payday loan scam.
Ultimately, if you fall for a short-term loan scam, you could lose a lot of money. If someone ends up taking out a debt in your name, it could also have an impact on your credit score.
Even if you need cash right away, a payday loan isn’t your only option. Other types of loans can help you with your cash shortfall:
“Short-term loans can be a useful form of borrowing for some, but should only be used as a last resort. If you’re already struggling for money, taking out an expensive loan could actually end up causing you more financial problems. You should always do your research before applying.””
These steps might not get you your money back, but they will make a dent in the ability of scam artists to function in the future while helping you protect your identity. The best way to prevent a scam is to know what one looks like, so familiarise yourself with this page to know what to avoid in the future.What to do if you've been scammed
Sometimes it can be hard to tell a scam from the real thing. If you think you’ve been scammed, there are steps you can take to protect your personal information and your money from being stolen.
There are reputable payday loan lenders, but there are also many disreputable companies in the industry as well. Be sure to do your research and thoroughly compare your options for a short-term loan before applying.
Browse our collection of payday loan guides, designed to answer all of your short term loan questions and help you find the right payday loan.
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