12 million Americans at risk of payday loan scams - are you one of them?: Internet Scambusters #1,111
Payday loans can be a useful source for emergency funds, but they're not only expensive but also a favorite scam target.
If you have to borrow from one of the 23,000 loan outlets in the US, you need to know how to check that you're dealing with a legit firm and you won't get ripped off by crooks.
In this week's issue, we'll give you the basics of what you need to know and point you to key sources for more information.
Let's get started…
How To Stay Safe From Payday Loan Scams
When you need money fast and you don't have any until your next paycheck shows up, it may be tempting to get a payday loan. But watch out - scammers are about! You could end up paying a lot more than the already astronomical fees some lenders charge.
Payday lending is a $10 billion industry in the US, with an estimated 23,000 lending locations. About 12 million Americans use short-term borrowings every year to solve their immediate financial needs. Typically, they're for less than $500 and supposed to be repaid when your next paycheck arrives, using post-dated checks the lender cashes in on the agreed date.
Many borrowers, however, have to repeatedly take out new loans when they're unable to repay the previous one - with extra charges heaped on top. According to research by MTC Federal bank, more than 80% of payday loans are followed by another loan request within 14 days.
Bearing in mind that it's usually the most financially vulnerable, like those with existing debt and poor credit records, who need the cash, the potential for a cycle of mounting debt, bankruptcy, and financial stress is ever-present when the scammers step in.
Unscrupulous Payday Loan Tactics
Here are some of the most common scams that payday borrowers face and the tactics crooks use to trick their victims.
Fake loans: Scammers advertise loans online, charge upfront fees, and then disappear. Often, they also collect bank account and credit card details, which they can use for identity theft. They may demand payment via untraceable methods like gift cards and money wires, and they may tell borrowers, after charging an initial fee, that more money is now required to guarantee the loan.
Sky high interest rates: A typical two-week loan can carry an interest rate equivalent to 400% a year or more, but disreputable lenders never disclose this - just the daily or weekly charge, which, in this case, may be around 15% for a couple of weeks. Some states, but not all, impose a cap on how much interest can be charged. Among those that don't, an annual rate of 600% and even as high as 1,000% is not unheard of.
Hidden costs and extras: In addition to the loan, lenders collect fees and then charge for extras like credit insurance or some form of club membership without disclosing these are optional. Borrowers sometimes don't realize what they're signing up for.
Helping themselves: Lenders access borrowers' bank accounts to collect their money, without getting permission from them. Sometimes, they may continue to take money after the loan has been repaid, claiming the debt has not been settled.
Repayment threats: Lenders illegally threaten borrowers with criminal charges for bounced checks. They also threaten to, and sometimes actually do, tell employers and family about the borrower's debt situation. In some cases, they pose as debt collection agencies to add pressure on the victim.
Safeguards Against Payday Loan Scams
When money is needed urgently, borrowers may not take the time either to explore alternative sources of cash or to research payday lenders to ensure they're dealing with a legitimate firm.
It's crucial to get advice and to educate yourself.
For example, you can quickly learn a lot from an online visit to the Consumer Financial Protection Bureau. Other useful resources include the Center For Responsible Lending and the nationwide network of financial experts you'll find at 211.org, which claims to have helped more than 20 million consumers with their money woes.
Here are 10 more actions you can take to safeguard against payday loan scammers.:
- Steer clear of upfront charges. Fees are usually added to the debt and collected when it is repaid at the end.
- Research the reputation of any lender you're considering dealing with. Scam victims sometimes report their experience online and to consumer organizations like the Better Business Bureau. And legitimate lenders have to be licensed and registered with your state. So, check all of these places.
- If you know people who have already used payday loans, ask them about their experience.
- Speak to your employer or bank and explore other loan options like credit unions.
- Read all documentation carefully. If it's thin on the ground or doesn't explain things properly, look elsewhere.
- Don't give your bank, employment, and other confidential information to anyone until you know you can trust them.
- If you get an unsolicited call offering a loan, hang up. Same goes for spam ads and emails. Ignore them.
- Beware of extended loan periods. More repayment time means more interest. And don't yield to high pressure tactics urging you to refinance.
- If you get a notice about unpaid debts, don't ignore it. Lenders are legally required to give you a written "validation notice." So, ask for one and dispute it if it's not accurate.
- Keep track of your credit rating and report. Fake payday lenders have also been known to take out loans in the names of people whose identities they've stolen.
If you know or suspect you've been scammed or are being targeted by a crook, report it to the police and your state consumer department.
Short-term money needs are not unusual. The US Federal Reserve Board says more than 40% of Americans don't have enough ready cash to meet an emergency.
With such high interest rates and the scam risks, it makes sense to build a small emergency fund, even if it takes months to pull together. And, before you ever need to ask for a payday loan, make sure you know how they work and where to safely get them. Do it now!
This Week's Alerts
Get smart: Pet supplies retailer PetSmart has warned customers about a rise in password-guessing attacks. The firm has not had a data breach; it says its records are secure. But it points out that crooks, armed with people's passwords from other data breaches, are trying them out on other sites including theirs. The alert underlines the importance of having unique passwords for every site where you sign on.
Riskiest scam: Investment fraud, including cybercurrency scams, has taken the number one spot in the 2023 league table of the riskiest consumer scams produced by the Better Business Bureau's Institute for Marketplace Trust. Employment scams came second, followed by online purchasing, home improvement, and romances. Also moving up BBB's annual table were credit repair and travel/vacation/timeshare scams.
That's it for today -- we hope you enjoy your week!