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 short term loan from a reputable lender in Canada.
⚠️ Warning: be cautious with short-term loans
If you're experiencing financial hardship and would like to speak to someone for free financial counselling, you can call Credit Counselling Canada on 1800 007 007. It's open from 8:00am to 5pm, Monday to Friday. When comparing short-term loans, ensure you take into consideration all fees, charges and interest to understand how much your loan might cost in total.
Alternatives to short-term loans
Consider these alternatives before applying for a payday loan:
Use online Government resources. The Financial Consumer Agency of Canada website demonstrates how small amount loans work – and suggests alternative options that may help you.
Payment plans. Talk to your electricity, gas, phone or water provider to see if you can work out a payment plan or receive an extension on your due date if you’re behind on payments.
Contact your creditors. Speak with creditors about extending the due date of your payment, or working out a new payment plan that works for both of you.
Seek personal loans elsewhere. Consider a small personal loan from a bank or a credit union. You may qualify for a loan with much lower interest rates than those offered by payday loan companies.
Pay with credit card. Consider paying with your credit card to cover your emergency bills or payments. This is not a long term solution, as you’ll need to pay off the balance as soon as possible, but it’s an alternative to a short term loan with high – and immediate – interest rates.
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:
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.
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. Check the websites of any lenders you’re interested in to confirm they operate in your province or territory of residence.
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.
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 short term loan before applying.
Frequently asked questions
Although there are many legitimate and reputable payday loan lenders, payday loans are known to be incredibly expensive. It’s not uncommon to see an APR higher than 400%. For this reason, it’s a good idea to investigate other financing options before deciding on a payday loan.
Payday loans are usually borrowed for a very short period of time. As the name implies, a payday loan is typically due when you receive your next paycheque from work. Because of this, lenders want to make a substantial profit from each loan and so they charge excruciatingly high interest rates and fees.
Start by contacting a reputable credit counsellor. They’ll help you fix the structural issues that led to your debt. You may even find ways to gather savings right away that’ll help you avoid taking out a payday loan.
Aliyyah Camp is a writer and personal finance blogger who helps readers compare personal, student, car and business loans. Aliyyah earned a BA in communication from the University of Pennsylvania and is based in New York, where she enjoys movies and running outdoors.
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