Not all payday loans are scams — there are legitimate lenders that will extend credit to those in need.
However, payday loans can be extremely expensive, and this may be why they’ve acquired reputations for being scams. On average, you’ll pay $15 to $30 per $100 you borrow, which calculates out to at least a three-digit 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, often causing them to take out more payday loans to pay off their debts.
All this said, there are payday loan schemes that really are scams. To protect yourself, you’ll want 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 desperate people. Most scams revolve around consumers unwittingly giving out sensitive information or sending money to unscrupulous individuals.
Here are three payday loan scams and how to avoid them:
A company posing a 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 have received your funds. Also, be wary of guaranteed offers. A legitimate lender cannot guarantee a loan without seeing 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 Security 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 vet any payday loan website you’re thinking about using. And read all of the fine print to make sure you understand it.
How to protect yourself from a payday loan scam
Compare multiple payday loan operators. 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.
Look for information and reviews online. Negative information (or even the lack of information) online can point to a payday loan scam at work.
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 state. Many states heavily regulate the payday loan industry, and in a few states payday loans aren’t legal at all. Knowing the laws will help you gauge whether a payday loan operator is legitimate or simply trying to scam you.
In which states are payday loans legal?
Where to get a legitimate short term loan
If you’re set on taking out a payday loan, check with the Better Business Bureau 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 identifying information about themselves.
Here are some reputable lenders you can consider for a short term loan:
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 cash shortfall. (For example, a personal loan can be a great choice, as it typically come with reasonable interest rates.)
Because payday loans can be very expensive, it can be a good idea to consider alternatives. You could ask friends or family for help, get a loan from a credit union or even negotiate bills with your creditors. 8 payday loan alternatives to consider
Look at these factors before taking out a loan
The fine print. Before taking out any loan, you’ll need to agree to a lender’s terms. Take your time and read the fine print before agreeing to anything. If there’s anything you don’t understand or find objectionable, don’t be afraid to ask questions or look elsewhere for a loan.
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 the future 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.
Contact the police. Your 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 bureaus will want to see that you’ve taken this action, so it’s an important first step.
Contact your bank. Since even legit 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 the Social Security Administration (SSA). If you’ve given out your Social Security number to a scam artist, you’ll need to contact the SSA as soon as possible to prevent identity theft.
Contact the top three credit bureaus. They can put a freeze on your credit report in case of any suspicious queries pop up. This will help prevent future damage from scammers trying to use your credit to buy expensive items.
File a complaint with the Federal Trade Commission (FTC). This can help the FTC and other agencies track fraudulent behavior and prevent other scams in the future. Visit its complaints page online to get started.
File a complaint with your State Attorney General. Your State Attorney General will note the scam and attempt to make a case against the perpetrators. If you’ve been scammed, reporting it could help find who did it and have them answer to the law.
These steps might not be able to get you your money back, but they will make a dent in the ability for 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 familiarize yourself with this page in order to know what to avoid in the future.
The bottom line
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.
Frequently asked questions
There are reputable payday loan lenders, but payday loans can be very expensive. It’s not uncommon to see APRs higher than 400%. For this reason, it’s a good idea to investigate other options before deciding on a payday loan.
Payday loans are usually extended for very short period of time. As the name implies, a payday loan is usually due when you receive your next paycheck. Because of this, lenders want to make a substantial profit from each loan.
Start by contacting a reputable credit counselor at the National Foundation for Credit Counseling. They’ll help you fix the structural issues that led to your debt. You may even identify enough savings right away that’ll help you avoid taking out a payday loan.
In a sense, yes. While loan sharks are different from other scams because you’ll actually receive your funds, you should still avoid going to a loan shark if you’re in a tight financial spot — you’ll likely be charged exorbitant interest rates with inflexible terms. Read about why you should never borrow from a loan shark to learn more.
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.
How likely would you be to recommend finder to a friend or colleague?
Very UnlikelyExtremely Likely
Thank you for your feedback.
Our goal is to create the best possible product, and your thoughts, ideas and suggestions play a major role in helping us identify opportunities to improve.
finder.com is an independent comparison platform and information service that aims to provide you with the tools you need to make better decisions. While we are independent, the offers that appear on this site are from companies from which finder.com receives compensation. We may receive compensation from our partners for placement of their products or services. We may also receive compensation if you click on certain links posted on our site. While compensation arrangements may affect the order, position or placement of product information, it doesn't influence our assessment of those products. Please don't interpret the order in which products appear on our Site as any endorsement or recommendation from us. finder.com compares a wide range of products, providers and services but we don't provide information on all available products, providers or services. Please appreciate that there may be other options available to you than the products, providers or services covered by our service.