When consumers shop around for a payday loan provider, they are at a high risk of getting scammed. There are thousands of payday loan providers in the US, and thousands of scams as well. Payday loan scams are prevalent, and they frequently target the most vulnerable people.
When someone falls for a payday loan scam, they may be subjected to unfair loan terms which demand unreasonably high-interest rates. Payday loan scams also involve the invention of unreasonable fees, which are not legal or not described in the loan term sheet.
In this article, consumers will learn about how to recognize common payday loan scams so that they can avoid getting scammed when they need cash fast.
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Why Payday Loans Carry A High Risk Of Getting Scammed
Payday loans are unique financial instruments in part because of how common scams are in the payday loan market. Payday lenders are notorious for running scams for a handful of different reasons.
First, when a person needs a payday loan, they are typically in a precarious financial situation where one of their bills cannot be covered by the money or other lines of credit that they have on hand. This means that these consumers are more likely to settle for the first line of credit, which can get the money quickly and with very few questions asked.
As a result, most payday loans are designed to offer a rapid disbursal of funds while also refraining from making credit checks on potential borrowers. In exchange for their speed and their lax credit verification, payday loan lenders extract a very high-interest rate for their funds.
High-interest rates cover the principal of the payday loan, but they do not necessarily help the lender to get an influx of money if the borrower cannot pay the full balance of the loan. Thus, to ensure that the lender can get at least a percentage of what they are owed even if the consumer cannot repay the full balance, most payday lenders include a schedule of fees.
These fees range from loan closure fees to late payment penalty fees. Not all of these fees are legal for the lender to extract in all jurisdictions, however. Furthermore, some types of fees are explicitly illegal in all jurisdictions.
Most consumers aren’t up to speed on the latest in payday loan regulations, however. This means that when they are faced with a new fee by a lender, they are more likely than not to accept the price and get their payday loan funding disbursed rather than to ask questions.
Common Payday Loan Scam Tricks
Payday loan scams include illegitimate fee structures, illegally high-interest rates, pushy lenders, and lenders who threaten borrowers. In general, many payday loan lenders are willing to skirt or explicitly deny the borrowing rights of consumers.
Extortion is one of the most common elements of a payday loan scam. In an extortion scam, a borrower is told that their payment is insufficient to cover the cost of the loan or the associated fees. Then, the borrower is threatened with reporting of their debt to their place of employment, relatives, or a credit bureau.
Alternatively, the lender may threaten the consumer with being reported to a collections agency. Importantly, lenders can make threats to consumers regarding collections even when they may not have a legally legitimate route to sending the debt to collections. These threats can be accompanied by mistruths, which make the borrower feel as though they have no choice but to comply.
Generally, there are several elements to a payday loan scam that consumers should be alert for. These elements include:
- A pushy or overly-involved payday lender agent before the loan has been signed
- An abusive or abrasive payday lender agent or collections agent after the loan is due
- Introduction of new fees after the loan is signed
- Introduction of new fees after the loan has been paid
- Adjustment of the loan’s payment terms after the loan is signed
While consumers need the funds from a payday loan quickly, lenders who try to push borrowers into agreeing to a payday loan often do so because they know that the terms of the loan are exploitative or illegal.
In other words, the more a payday lender seems to be placating consumer concerns and pushing them towards signing the loan document before the consumer is ready, the more likely it is that the lender intends to scam the borrower.
The common trend among payday loan scams is that the terms of the loan and its fee schedule are adjusted after the consumer has agreed to the loan. This is illegal, as the consumer only agrees to the terms of the initial loan contract. If the lender needs to change the terms of the loan, the lender must issue the consumer with a new loan term sheet.
The lesson for consumers is to read all payday loan contract documents very carefully. Take note that a payday loan contract may be highly exploitative even when it is not illegal or a scam to speak of.
To understand more fully if an exploitative interest rate or aggressive fee structure is a scam or illegal, it’s necessary to compare the terms of the payday loan with the state and federal regulations which mandate limits on interest rates and fees.
Other Unsavory Tactics Used By Payday Lenders
Aside from explicitly illegal scam tactics used by payday lenders, payday lenders can also harm consumers in different ways. For example, many payday lenders choose to harass their borrowers and threaten to send them to collections if they do not pay their balance ahead of time.
This can include impersonating a collections agency or hiring a collections agency to start probing the contacts of the borrower to frighten them into compliance.
Importantly, collections agencies and payday lenders are not allowed to state that they are investigating the creditworthiness of the borrower when they are talking to the contacts of the borrower. However, many are willing to skirt this rule or violate the spirit of the law to make sure that borrowers fear for their reputation in the event of a default.
Furthermore, many payday lenders give information from borrowers to malicious third parties who may attempt to target consumers with scams. These scams may range from the common social security impersonator scam to more complex scams that accuse the consumer of committing a crime that they must pay for.
These scams, while illegal, can be very dangerous to consumers, especially if they are not aware that such scams exist. Red flags to look out for include phone calls or emails which:
- Threaten the revocation of government-given social benefits unless money is paid
- Threaten imprisonment or a lawsuit unless money is paid
- Threaten job blacklisting unless money is paid
- Offer a large sum of money in the near future in exchange for a small amount of cash immediately
- Offer an expensive product for cheap or free
The line between these scams and payday loan scams is firm, but people who take out payday loans are at a higher risk of being propositioned with these scams nonetheless.
What To Do After Getting Scammed
If a consumer suspects that they have taken out a payday loan with unfair or illegal terms, there are several actions to take.
First, report the unsavory lender to the appropriate authorities so that they can investigate the situation and take legal action if necessary.
Second, if possible, borrowers should hire a consumer attorney for representation against the lender and any collections agencies which the lender has hired to make good on their debt. A consumer attorney may be able to work pro bono if they think they will be able to successfully sue a payday lender and get a settlement.
If consumers are getting harassed by payday lenders despite upholding the terms of the loan, it may be harder to take action, however. A consumer lawyer may still be appropriate, but consumers facing harassment from lenders may have to contact their telephone company to get the number of the harassers blocked.
Similarly, it may be helpful to close the bank accounts and credit cards associated with the information given to the payday lenders to prevent them from having access to the information and funds contained within.
Avoiding Payday Loan Scams
The surest way to avoid being scammed by a payday loan is to avoid taking out payday loans if there is any other option that allows a consumer to handle their financial needs. Payday loans are never prudent economic propositions as a result of their high-interest rates and high fees.
When consumers do take out payday loans despite the risks, the best practice is to read the loan terms carefully and refuse to abide by any changes to the loan terms which occur after the loan contract has been signed at the start of the loan process.
Finally, remember that taking out a payday loan also results in a higher level of exposure to additional scam attempts. Remain alert and try to find a better financial path forward as rapidly as possible.
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