Payday Loan Scams | How to Spot Them & Avoid Getting Stung

How to avoid payday loan scams

When you are struggling for cash and need funds quickly, you might consider a payday loan. These kinds of short-term finance options are tempting if you are in a difficult financial situation or need extra money before your next paycheck comes in. Many people turn to payday loans for unexpected expenses, such as a car breaking down or a faulty boiler.

Payday loans have had a bad reputation over the years, and chances are, you have heard about payday loan scams. It is important to remember that not all payday loan lenders are scam artists, and some are legitimate lenders who can provide you with credit when you need it the most. However, payday loan scams do exist, and you must know what to look out for to protect yourself.

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What is a payday loan scam?

Short-term finance and payday loans are notorious for being very expensive. Interest rates on these loans can extend into four figures, making them a very expensive option. Some borrowers find themselves in a spiral of debt following a payday loan because they cannot repay the borrowed amount plus interest. While this technically isn’t a payday loan scam, some people view these high-interest rates and difficult repayment terms as scams for borrowers. The hard truth is that this is the way payday loans work, and you need to be confident you can pay back the borrowed amount, plus interest, before agreeing to a loan.

What are the different types of payday loan scams?

Payday loan scams are a real issue, and some schemes are scams that need to be taken very seriously. The payday loan industry, just like many other financial industries, has some scammers who prey on people who are desperate for cash. The majority of payday loan scams work by tricking borrowers into providing sensitive information or sending money directly to a scammer. There are three main types of payday loan scams to be aware of:

  • Upfront fees: A scammer posing as a legitimate lender might claim they will guarantee a payday loan if you pay them a fee upfront. It is common for these scam companies to ask for funds provided via money order, gift cards or wire transfer because these are all methods where it is almost impossible to retrieve the money back. After funds have been sent over, the scam company will disappear without providing you with the payday loan as promised.

  • Online forms: Some payday loan scams work by asking you to complete a fake online form. These will ask for all of your personal details, as well as your bank details. On completion, you won’t receive the payday loan as planned, but the scammer will sign you up to a membership scheme that takes funds directly from your bank account.

How to spot a payday loan scam?

Identifying a payday loan scammer compared to a legitimate lender is easy once you know what to look out for. Scammers may give a few warning signs, and being vigilant when choosing a quick cash loan provider can make these easier to spot. If you are considering a payday loan, look out for these warning signs:

  • Guaranteed loan approval: if you come across payday loan lenders who offer guaranteed approval for their loans, it is likely to be a scam. All responsible and legitimate lenders must follow regulations, and they are not allowed to guarantee an application will be approved. Whether for payday loans or longer-term finance, every lender is obliged to carry out comprehensive credit checks and assess your financial situation before deciding if they can lend to you.

  • Upfront fees: as we mentioned already, a common payday loan scam is that scammers will ask for an upfront payment of fees before issuing the loan. No legitimate payday loan lender will request payment upfront, so never put your trust in a company asking for this.

  • No fine print: before entering any of your personal information on a payday loan website, make sure you thoroughly read the fine print provided. Any lender that doesn’t give terms and conditions on their website is likely to be illegitimate. All real payday loan lenders are obliged to provide full details of the agreement you are entering into before giving your personal information.

Your questions, answered

As well as keeping an eye out for warning signs like these, there are a few other things you can do to avoid payday loan scams:

  • Compare multiple lenders: As with any financial product, compare multiple different lenders. Not only is this worthwhile for making sure you are getting the best interest rates and repayment terms, but it can help you spot fraudsters. Gauging the legitimacy of one payday loan website on its own can be challenging, but when you compare a few, you can begin to see the red flags.
  • Read online reviews: Looking for testimonials and reviews of previous customers is a quick and easy way of avoiding quick cash loan scams. Check review websites for feedback from previous borrowers and see what they have had to say about their payday loan experience. A lender with no reviews is just as much of a red flag as a lender with negative reviews. Having no reputation online means a business is highly likely to be a scammer.
  • Check the FCA: The Financial Conduct Authority should authorise payday loan lenders. The FCA is a completely independent body that protects borrowers from financial scams. A company that the FCA authorises is proven to be honest and fair. Any payday loan company that is not a part of the FCA register could potentially be a scam.

Take unsolicited calls with caution: Never accept a payday loan offer over the phone, especially from an unsolicited phone call. Verifying the legitimacy of a caller is impossible so, always be wary of phone calls claiming to be lenders. If you have a payday loan and receive an unsolicited phone call, call your lender directly and discuss your repayment terms.

Unfortunately, it is fairly common to fall victim to a payday loan scam. Fraudsters can make these scams very convincing, and once you have parted with your money or personal information, it might be too late. The hard truth is that getting your money back may not be possible, but there are some things you can do to protect yourself and other borrowers in future:

  • Inform your bank: The first thing you should do if you have fallen victim to a payday loan scam is let your bank know that your details may have been compromised. If you provided card details, they can block your bank card and prevent it from being used. If you provided bank account details, they could keep an eye out for unusual activity, such as new direct debits.
  • Report it: if you used a payday loan lender not authorised by the FCA, you could report them to be investigated. Go to the FCA website and fill in an unauthorised firm reporting form which will ask for details about the company in question. The FCA also advises victims of scams to report the lender to Action Fraud.

Let others know: While it can be frustrating knowing you are unlikely to get your money back, you can do your bit to protect future borrowers from the same scam. Leave a review online about your experience with the company and share details of the company on social media. This can help warn others to not fall foul to the scammers further down the road.

If you need short-term finance for an emergency or unexpected expense, a payday loan might be the best option for you. As long as you know how to protect yourself and avoid scammers, getting a short-term loan from a legitimate lender can be helpful during difficult times. Payday loans are often designed for borrowing for very short periods, such as several weeks. If you need a loan for a longer period or will not pay back your loan amount quickly, other short-term finance options might be better suited to you.

At The Money Shop, we have a dedicated team of financial experts on hand to help you make the right decisions about your money. We can offer guidance on payday loans and short-term finance and help you understand how to avoid payday loan scams.

For more information on payday loan scams and advice on choosing a trustworthy lender, contact our knowledgeable team.