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How to avoid a payday loan scam

Need a payday loan but aren't sure how to find a reputable lender? We show you how to avoid falling for a scam.

If you’re short on cash, you might be considering taking out a payday loan. You may also have a lingering question on your mind: Are payday loans a scam? Let’s take a look at why payday loans have a poor reputation, as well as common scams you should watch out for. Finally, we’ll discuss how you can get a legitimate payday loan from a reputable lender in Canada.

Are all payday loans scams?

Not all payday loans are scams – there are legitimate lenders that abide by any provincial laws in place and offer financial help to those in need.

However, since payday loans can be extremely expensive, this may be why they’ve acquired a reputation for being scams. On average, you’ll pay $15 to $25 per $100 you borrow, depending on the province you reside in. This calculates out to at least a 3-digit annual percentage interest rate (APR), usually sitting somewhere around the 400% mark.

Payday loans are also notorious for trapping consumers in endless cycles of debt. Since these loans are so expensive, borrowers often have trouble paying them off, often causing them to take out more payday loans to pay off their debts.

With this said, there are payday loan schemes that really are scams. To protect yourself, you’ll need to know what to watch out for.

How do payday loan scams work?

Like many financial industries, the payday loan industry has scammers that prey on people who desperately seek money. Most scams revolve around consumers unwittingly giving out sensitive information or sending money to unscrupulous individuals.

Here are 3 common payday loan scams and how to avoid them:

  • Upfront fee

    A company posing as a payday loan lender will guarantee you a loan if you pay an upfront fee first. The company may 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.

    To avoid this scam, don’t give any money to a lender in order to get a loan. Legitimate lenders do not charge fees before you’re approved for a loan. Any one-time fees for establishing the loan should only be charged after you’re approved and you have received your funds. Also, be wary of guaranteed offers. A legitimate lender cannot guarantee a loan without assessing your full application.

  • Payday loan collection

    In one common payday loan scam, someone will call 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 – your bank account number, for instance, or even your Social Insurance 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.

    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 do currently have a loan, call your lender directly to verify the terms of repayment.

  • Fake online form

    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 operators of the website won’t actually extend a loan to you. Instead, they’ll enroll you into some type of membership program that will take money from your bank account.

    To avoid falling prey to this type of scam, thoroughly research any payday loan website you’re thinking about using. Additionally, read all of the fine print to make sure you understand the terms and conditions.

How to protect yourself from a payday loan scam

  • Compare multiple payday loan providers. It may be difficult to gauge the legitimacy of one payday loan website by itself, but you may be able to spot red flags when you look at multiple websites and draw comparisons between them.
  • Look for information and reviews online. Negative information (or even the lack of information) online can point to a payday loan scam. Always check for contact information and head office locations.
  • Be wary of unsolicited phone calls. Don’t accept a payday loan offer through the phone – there’s probably a better deal elsewhere. Additionally, there’s no way you can verify the legitimacy of the caller.
  • Understand the laws governing payday loans in your province. While not all provinces and territories have regulations surrounding payday loans, many provinces do. Knowing these laws will help you gauge whether a payday loan operator is legitimate or simply trying to scam you.
Are payday loans available in my province or territory?

Payday loans are available in all provinces and territories across Canada. You should be aware that payday loans are regulated by individual provinces, which means costs and fees can vary. Ensure that any lender you choose abides by the laws of the place you live.

At the time of writing in January 2019, the Yukon, Nunavut and the Northwest Territories do not have legislation regulating payday loans at the territorial level. Payday loans are regulated in these territories at the federal level only.

Find out how much lenders can charge across Canada

⚠️ Warning: Be cautious with payday loans
Payday loans are expensive. If you're experiencing financial hardship call Credit Counselling Canada for free financial counselling (Monday-Friday 8:00am-5:00pm at +1 866-398-5999). Consider alternatives instead of a payday loan:
  • Local resources. Government programs and nonprofits offer free financial services and help with food, utilities and rent.
  • Debt relief companies. There are services to help you reduce your debt payments.
  • Payment extensions. Talk with bill providers about longer payment plans or due-date extensions.
  • Side jobs. Sell unwanted items online, sign up for food delivery and more.

Compare legitimate payday loans

If you’re set on taking out a payday loan, check with the Better Business Bureau (BBB) to make sure the lender you’re considering is legitimate. Also contact the lender and ask for their physical address and phone number. If a lender is legitimate, they’ll freely give out their contact information in order for you to identify them as legitimate lenders.

Name Product Loan Amount Loan Term Interest Rate Turnaround Time Serviced Provinces
Cash Money Payday Loan
$100 - $1,500
5 - 40 days
Varies by province
As little as 15 minutes with INTERAC e-Transfer
BC, NS, ON, SK
Apply for your first $300 payday loan at a $20 cost (excludes SK applicants).

You'll need to be 18 years of age or older and have a net income of at least $1,000/month. Residents of MB and NB must apply in-store for a loan.
iCASH Payday Loan
$100 - $1,500
7 - 62 days
Varies by province
As little as 2 minutes with INTERAC e-Transfer
AB, BC, MB, NB, NS, ON, PEI
Get up to 20% in cash back once your payday loan is fully repaid. Conditions apply.

To be eligible, you'll need to be at least 19 years of age and have a net income of at least $800/month deposited into your bank account.
GoDay Payday Loan
$100 - $1,500
Up to 62 days
Varies by Province
As little as 2 minutes with INTERAC e-Transfer
AB, BC, MB, NB, NS, ON, PEI, SK
To apply, you'll need to be a Canadian resident over the age of 18 with a valid email address, phone number and an open bank account with a Canadian bank or credit union.
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Compare up to 4 providers

Maximum borrowing costs per province
Always refer to your contract for exact repayment amounts and costs as they may vary from our results.
Province Maximum allowable cost of borrowing
Alberta, British Columbia, New Brunswick, Ontario & Prince Edward Island $15 per $100 borrowed
Manitoba & Saskatchewan $17 per $100 borrowed
Nova Scotia $19 per $100 borrowed
Newfoundland and Labrador $21 per $100 borrowed
Northwest Territories, Nunavut & the Yukon $60 per $100 borrowed
Quebec Limit of 35% annual interest rate (AIR)

Payday loan alternatives

Since payday loans can be very expensive, it’s a good idea to consider your alternatives. Even if you need cash right away, a payday loan isn’t your only option.

There are other types of loans that can help you with your financial shortfall. A personal loan can be a great choice, as it typically comes with more reasonable interest rates than a payday loan. Alernatively, you could ask friends or family for help, get a loan from a credit union or even negotiate bills with your creditors.

Look at these factors before taking out a loan

  • The fine print. Before taking out a loan, you’ll need to agree to a lender’s terms and conditions. Take your time to read the fine print before agreeing to anything. If there’s anything you don’t understand or don’t agree with, don’t be afraid to ask questions or look elsewhere for a loan. You’re not obligated to sign a loan contract.
  • The interest rate. A reputable lender will tell you a loan’s interest rate up front. Once you know the rate, you can calculate how much you’ll pay in interest. Consider your budget, including your income and expenses, and think about your ability to repay the loan.
  • Fees. Make sure you understand any fees you’ll pay to take out a loan. Some lenders add hidden fees to their loans, so confirm the total amount you’ll pay before you agree to anything. For example, some payday loans may come with fees for loading funds onto prepaid debit cards.

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. Consider the following:
  • Contact the police. Your local police should have a non-emergency number that you can call when you know you’ve been scammed. File a police report in order to legitimize the situation. Your bank and credit bureau will want to see that you’ve taken this action, so it’s an important first step.
  • Contact your bank. Since even legitimate lenders will ask for your bank account information, you may have given this to a scammer. Even if they haven’t stolen anything from your account yet, putting your bank on alert will help them track your account for any unusual activity.
  • Contact Service Canada. If you’ve given out your Social Insurance Number to a scam artist, you’ll need to contact Service Canada as soon as possible to prevent identity theft.
  • Contact the two credit bureaus. They can put a freeze on your credit report in case any suspicious queries pop up. This will help prevent future damage from scammers trying to use your credit to buy expensive items.

These steps might not be able to get you your money back, but they will help you to protect your identity. The best way to prevent a scam is to know what one looks like, so familiarize yourself with this page in order to know what to avoid in the future.

Bottom line

There are plenty of 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 payday loan before applying.

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