Are payday loans a scam? What to watch out for

You can find reputable payday loan lenders. But watch out for scams that prey on those who need quick cash.

How to avoid payday loan scams Common loan scams
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If you’re desperately short on cash, you might be thinking about applying for a payday loan. However, you might also be aware of payday loan scams. It’s important to know what to watch out for and how to find a legitimate lender to ensure you don’t get caught out.

Are all payday loans scams?

Not all payday loans are scams — legitimate lenders will extend credit to those in need.

However, payday loans can be extremely expensive, and this is why they’ve acquired a bad reputation over the years. You can potentially pay up to £24 in interest when borrowing £100 for 30 days, which calculates to a four-figure 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, which can prompt them to take out more payday loans to pay off their debts.

But while this doesn’t technically make them a scam, there are plenty of payday scam companies out there. To protect yourself, know what to watch out for.

Warning: Late repayment can cause you serious money problems. For help, go to moneyhelper.org.uk.

Please note: High-cost short-term credit is unsuitable for sustained borrowing over long periods and would be expensive as a means of longer-term borrowing.

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 3 payday loan scams and how to avoid them:

  • Upfront fees

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

    How to avoid: Don’t give any money to a lender to get a loan. Legitimate lenders do not charge fees before you’re approved. 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.

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

    How to avoid: Thoroughly vet any payday loan website you’re thinking about using. And read all of the fine print to make sure you understand it.

  • Payday loan collection

    In this scam, someone phones 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, including your bank account 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.

    How to avoid: 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 currently have a loan, call your lender directly to verify the repayment terms.

Why does it happen, and why are payday loan companies a key target for fraud?

Payday loans tend to be popular with people desperate for cash and with poor credit due to past financial problems. It’s quick and easy to get approved for a payday loan, and the promise of fast cash can make applicants an easy target for scammers – if you need money quickly, it’s easy to forget to do your due diligence first.

What’s more, as many applicants will already be in debt, it can be easy to hand over funds when a bogus debt collector is harassing you.

How to pick up on a payday loan scam

There are a number of warning signs that can help you spot a payday loan scam. For example:

  • The lender is not registered and authorised with the Financial Conduct Authority (FCA). If a lender isn’t listed on the FCA register (and make sure you check), it won’t be a legitimate and authorised company, so you should steer clear.
  • Guaranteed acceptance. If a company promises guaranteed approval for its loans, it’s likely to be a scam. Every lender must carry out a credit check before lending to you.
  • Upfront fees. If a lender asks for upfront payment of fees, it’s probably a scam.
  • Unsolicited calls, letters and emails. If you’re contacted out of the blue about a payday loan, don’t agree to anything on the spot. Do some research to check whether the company is legitimate, and if you have any doubts, walk away.
  • No small print. If a lender can’t show you the terms and conditions of your contract, it should be avoided. All legitimate companies are required to provide full details of the agreement you are entering.
  • No or poor reviews online. If a company has no customer reviews or the reviews are bad, it could be a scam.

Signs of stolen details

One of the biggest signs that your details have been stolen is unusual activity on your bank account statements. If you spot any unfamiliar transactions, whether for payments or cash withdrawals, alert your bank immediately.

It’s also sensible to check your credit report regularly. You can do this for free, and it enables you to see whether anyone has tried to take out credit in your name (you’ll see a list of credit searches on your report) and whether they were successful. If they were, there will be a new debt in your name. You’ll need to speak to the relevant lender if this is the case.

Another sign to be aware of is surprise packages being delivered to your home – this could suggest someone is using your details to pay for goods and services but failed to intercept the goods before they arrived. You might also receive letters from solicitors or debt collectors asking for a debt (that isn’t actually yours) to be repaid.

Who is vulnerable to a payday loan scam?

Those who need cash quickly and can’t borrow through more traditional methods, such as a personal loan or credit card, due to their credit history, are more likely to be susceptible to a payday loan scam.

What are the consequences of a short-term loan scam?

Ultimately, if you fall for a short-term loan scam, you could lose a lot of money. If someone ends up taking out a debt in your name, it could also have an impact on your credit score.

Payday loan alternatives

Even if you need cash right away, a payday loan isn’t your only option. Other types of loans can help you with your cash shortfall:

  • Ask family or friends for help. Though it’s never easy to approach family or friends for financial help, it’s a much cheaper option as you’re unlikely to be charged interest on top of your borrowing, or if you are, it will be at a far lower rate than a payday loan.
  • Credit builder credit cards. Some providers offer credit cards designed for those with a poor credit rating. These cards charge much higher interest rates than other cards, and credit limits are lower too. But as long as you repay all or most of the balance each month, they are still cheaper than a payday loan. Check out our guide to credit builder cards that you can consider.
  • Authorised overdrafts. If you don’t already have one on your current account, it might be worth asking your bank if you can apply for an authorised overdraft – or if you do have one, ask for it to be extended. Although interest rates on overdrafts are usually high, they can still be cheaper than using a payday loan.

“Short-term loans can be a useful form of borrowing for some, but should only be used as a last resort. If you’re already struggling for money, taking out an expensive loan could actually end up causing you more financial problems. You should always do your research before applying.””

Emily Herring, Finder personal finance expert

Look at these factors before taking out a loan

  • The small print. Before taking out any loan, you’ll need to agree to a lender’s terms and conditions. Take your time and read the small print before agreeing to anything. If there’s anything you don’t understand or don’t agree to, don’t be afraid to ask questions or look elsewhere for a loan.
  • The interest rate. A reputable lender discloses 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. You can call the police on 101 to inform them of what’s happened and file a police report to legitimise the situation. Your bank and credit bureaus will want to see that you’ve taken this action, so it’s an important first step. If you feel immediately threatened or unsafe, call 999.
  • 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 helps them track your account for any unusual activity.
  • Contact Action Fraud. All scams should be reported to Action Fraud, the UK’s national reporting centre for fraud. You can do this online or by phone on 0300 123 2040.
  • Contact Cifas. If you have identified fraudulent activity, you can pay to request Protective Registration with Cifas, the UK’s fraud prevention service. You’ll need to do this online, and it costs £25 for 2 years. This tells any organisation that uses Cifas data to be extra vigilant when your details are used to apply for their services or products. Knowing you’re at risk, they will carry out extra checks to make sure it’s really you who is applying.

These steps might not get you your money back, but they will make a dent in the ability of 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 familiarise yourself with this page 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

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