Payday loans are notoriously bad deals for consumers, providing short-term fixes to financial dilemmas at an extremely high cost. Con artists are finding ways of making them even worse.
These days, fraudsters targeting consumers who are down on their luck and desperate for money are providing another reason for consumers to avoid the temptation of a payday loan. The growing popularity of online loans has attracted scam artists who are eager to prey on these vulnerable consumers.
In a typical payday loan scam, the victim, who may or may not have ever actually applied for or taken out a loan, receives a call or email demanding that they pay back an overdue debt. Because of porous information-sharing practices, consumer's personal information often finds its way into the hands of fraudsters, making it easy for them to recite the consumer's personal and confidential information.
The scam artist may threaten the consumer with immediate arrest if he or she does not pay right away. This is a clear giveaway that it's a scam, but it also causes people to act irrationally out of fear. Scammers have been known to make dozens of such threatening phone calls to victims' homes or places of work in order to extract funds. Victims are often accused of perpetrating check fraud, forgery or money laundering to scare them into paying up immediately, when in fact no money is owed.
Consumers shopping for an online payday loan should be aware that even legitimate-looking Web sites could in fact be fronts for scammers. Some “red flags” of a possible scam loan Web site include:
- Requests to pay upfront before receiving a loan
- Payment is requested via wire transfer
- Payday loan Web sites that lack working phone numbers or mailing addresses
- The payday lending company is based overseas
- Loan packages that sounds “too good to be true”
Even legitimate payday loans, whether acquired online or in person, are already notorious for outrageously high interest rates. There costs are often hidden in fine print or outright lied about. The Federal Trade Commission recently sued several payday loan companies for “lying about interest rates, requiring borrowers to let the company take money out of their bank account automatically and threatened to sue borrowers or have them arrested for non-payment.”
Payday loans should be a last resort for cash-strapped consumers. They may solve financial issues in the short term, but paying it back will put you further into debt. For example, a recent survey of online payday lenders by the Consumer Federation of America found that the typical cost of a two-week $500 loan is $125, or a whopping 652 percent APR.