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Are payday loans a scam? What to watch out for

Watch out for these red flags when comparing short-term lenders.

If you’re desperately short on cash, you may be thinking about 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 less-than-stellar reputation, as well as which scams you should watch out for. Finally, we’ll discuss how you can get a legitimate short term loan.

Are all payday loans scams?

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:

  • Upfront fee

    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.

8 warning signs of a predatory lender

You know how a predatory lender can hurt you, now learn what to look out for when comparing lenders. One or two warning signs doesn’t necessarily mean a lender isn’t legit, but you might want to steer clear if you notice multiple red flags.

1. It sounds too good to be true

If it seems too good to be true, it probably is. Read your contract carefully for hidden fees and keep an eye out for sentences that seem intentionally confusing. Make sure you fully understand what you’re getting into before you sign it. And keep an eye out for exception deals. If you don’t have strong credit or a regular income coming in, but a lender guarantees you a low-interest loan with favorable rates, you might be looking at a scam.

2. The lender contacted you

Predatory lenders often use TV ads, aggressive telemarketing techniques and even door-to-door salespeople to convince you that you need a loan. If the loan wasn’t originally your idea, chances are you’re working with a lender that doesn’t have your best interest in mind. Even so, only some lender-initiated deals are scams.

3. The lender isn’t licensed in your state

Many states require lenders to have a license. Read up on your state’s laws and make sure your lender is up to snuff, especially if it charges extremely high rates and fees. If your lender is required to have a license, check your local department of business oversight to make sure it’s registered. If it’s not, you could be dealing with a loan shark or other predatory lender.

4. The lender isn’t up front about costs

Some lenders might be hesitant to give you information about loan costs until they know your credit score and income. This might be a sign that their loans are expensive, though not necessarily a sign of a predatory lender.
But when a lender doesn’t want to give you details about your loan’s cost even after you’ve provided information about your personal finances, consider looking elsewhere.

5. The lender doesn’t run a credit check

No-credit-check loans might sound like a fast and easy option for financing, but if a lender doesn’t look at your ability to pay back a loan, you could be getting into something you can’t afford.
Beyond this, lenders often assume the worst on a no-credit-check loan, which means they typically charge the highest rates and fees they can get away with.

6. The lender charges extra for poor credit

Your credit score typically comes into play when a lender decides which rates, fees and terms you’re eligible for. But most legitimate lenders don’t charge extra fees for having bad credit.
Others might charge you much higher rates than you’re eligible for with other lenders. Avoid this by prequalifying with a few lenders to get a ballpark idea of what rates you should be getting.

7. You’re rushed to sign the contract

If a lender doesn’t want you to read the contract carefully, that could be a sign it’s trying to hide something. In this case, stand your ground and be extra careful when you go over your contract. A legitimate lender shouldn’t pressure you for wanting to know what you’re getting into.

8. There are blank spaces on the contract

Never sign a document that has blank spaces where a lender could potentially go back in and add clauses that you never agreed to, like right-to-offset clauses. Ask your lender for another copy of the contract without the blank spaces — or look for a loan somewhere else.

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 services you can consider for a short term solution:

1 - 0 of 0
Name Product Filter Values Loan amount Turnaround time Requirements
Chime SpotMe®
Not rated yet
Chime SpotMe®
Up to $200
Same day
Single qualifying $200 direct deposit into Chime checking account in the last 34 days.
Access fee-free overdrafts up to $200 when eligible. Plus get your paycheck up to 2 days early with direct deposit. See Chime terms and conditions.
Smart Advances
Not rated yet
Smart Advances
$100 to $20,000
As soon as one business day after loan closing
Have a regular income, 18+ years old, be a U.S. citizen with a valid SSN, have an open bank account, meet any additional requirements your lender may have
Smart Advances was designed to help you request the loan you need, for any reason.
OppLoans Installment Loans
Finder Rating: 4.7 / 5: ★★★★★
OppLoans Installment Loans
$500 to $4,000
As soon as the same business day.
+18 years old, Receive paychecks through direct deposit, Meet minimum income requirements, Live in eligible state
Comes with the option to change your due date so you won’t fall behind on repayments.
Not rated yet
1 to 3 business days, or instant with a fee or Premium subscription
Bank account must have at least 60 days of activity, Balance must be above $0 and have an average minimum balance on pay day
Have up to $250 automatically deposited into your account — for a $9.99 membership fee.
Possible Finance Mobile Installment Loans
Up to $500
As fast as 1 business day
Checking account with 3+ months of banking history, $750+ monthly income, live in eligible state, ages 18+
Borrow up to $500 with just a few swipes — but only for residents of 21 states.
LendYou Short-term Loans
Finder Rating: 2.5 / 5: ★★★★★
LendYou Short-term Loans
$100 to $1,000
Same business day to 1 business day
$1,000+ monthly income, direct deposit, US citizen or permanent resident, ages 18+
Get offers from potential lenders in minutes by filling out just one online form.
MoneyLion Instacash advances
Up to $500 or $1,000 with RoarMoney account
Up to 5 days or instant for a fee
Bank account must have at least 60 days of activity, show recurring deposits and must have a positive balance
Fee-free, interest-free cash advances up to $250.
Fast5kLoans Short-term Loans Connection Service
Finder Rating: 3.5 / 5: ★★★★★
Fast5kLoans Short-term Loans Connection Service
$100 to $35,000
As soon as the next business day
Regular source of income, Verifiable bank account, US citizen, Ages 18+
Get connected with multiple lenders you might qualify with — even if you have bad credit.
CashNetUSA Loan
Finder Rating: 3.6 / 5: ★★★★★
CashNetUSA Loan
Varies by state
As fast as same business day
Regular source of income, bank account, US citizen or permanent resident, age of majority in your state
Sign up for its discount program to get access to coupons and deals on everything from dining out to tax services.

Payday loan 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 cash shortfall. For example, a personal loan can be a great choice, as it typically comes 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 you can call when you know you’ve been scammed. File a police report 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

Is a payday loan a good idea?
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.
Why are payday loans so expensive?
Payday loans are usually extended for a very short period. 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.
What should I do to get out of debt?
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.
Are loan sharks a scam?
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.

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8 Responses

    Default Gravatar
    ValerieApril 25, 2019

    Do consumer needs pay day loan really exist i really dnt think they do

      Default Gravatar
      nikkiangcoApril 26, 2019

      Hi Valerie,

      Thanks for getting in touch!

      There are a several reasons why consumers need payday loans however, it’s usually for covering immediate cash needs like paying bills, until you get your next paycheck.

      Payday loans come with high rates and fees though, which can trap consumers in a cycle of debt so alternative loan options should be considered before opting for a short-term loan.

      Hope this helps!


    Default Gravatar
    GloriaSeptember 6, 2018

    Is Speedy Cash licensed to do business in the state of VA?

      JhezelynSeptember 7, 2018Finder

      Hello Gloria,

      Thank you for your comment.

      Upon checking, yes, Speedy cash is licensed to operate in VA.

      Should you wish to have real-time answers to your questions, try our chatbox on the lower right corner of our page.


    Default Gravatar
    MicheleApril 11, 2018

    I have taken an internet payday loan out on the past. I have repaid most of them off according to the contract and some I had to settle the lender, but paid eventually. My family, my work and myself all receive harassing phone calls from a 3rd party. I’m sure my information has been sold. It’s very embarrassing, the cycle seems to be never ending. How do I stop this?

      JoshuaApril 12, 2018Finder

      Hi Michele,

      Thanks for getting in touch with finder.

      I’m sorry to hear about your situation, Michele.

      If you have already paid all your outstanding debt, then there’s no reason for the lender to continue bothering you. Usually, if a borrower isn’t able to pay, they are endorsed to a collection agency which might explain why you are getting a phone call from a 3rd party. Here’s what could happen if you don’t pay back your payday loan.

      The best way for you to stop people from harassing you is to pay off your balance. Now, you mentioned you already paid them. In this case, you need to directly get in touch with your lender and inform them that you already paid your dues. They should be able to fix the problem.

      Each state and city has its own laws regarding payday loans. If you’re being harassed by a collection agency, your most important step is to become informed about your rights and obligations under the law, including what agencies can and can’t do when trying to collect the debt.

      When dealing with a collection agency, know that they’re trying to scare you into paying whatever you can. Instead, stand firm when dealing with these aggressive collectors.

      I hope this helps. Should you have further questions, please don’t hesitate to reach out again.

      Have a wonderful day!


    Default Gravatar
    MarguretteAugust 19, 2017

    I was excepted for a loan this loan company put x amount of dollars in my account then wanted me to get some cards with that money to get my loan I refused to do it this amount is still in my account what do i do with it?

      MariaAugust 19, 2017Finder

      Hi Margurette,

      Thank you for your inquiry.

      If the check or the lender seems suspicious to you, you can contact your bank and ask for their assistance in returning the money to the depositor’s account.

      You can also ask your bank for information about the sender account to help you investigate further if the account is genuine and to figure out who’s trying to scam you. Then, consult with an attorney about your options for recourse.

      Should you consider getting a loan in the future, make sure you apply for a short-term loan from trusted companies.

      I hope this helps.


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