5 Payday Loan Scams You Didn't Know About (Until Now)

How Do You Know If a Payday Loan Is Legitimate?

Payday loans can be a viable option when you need money fast. But any situation in which money is involved  — and consumers feel pressured — is a perfect target for scammers. According to the Better Business Bureau (BBB) [*]: 

Fraudulent payday loans have increased by a whopping 27% since the start of the COVID-19 pandemic. 

Unfortunately, it’s not just fake loans that you need to worry about. Even legitimate payday loans can be harmful to consumers and their credit standings. 

While some states have capped payday loan interest rates, they can still be as high as 36% — double the average credit card interest rate [*].

Knowing the risks of payday loans and associated scams can keep you from losing money, or worse: becoming a victim of identity theft. In this guide, we’ll explain what payday loans are, red flags to look out for when applying for a new loan, and what to do if you think you’re the target of a scam.

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What Are Payday Loans? Are They All Scams? 

Payday loans — sometimes called “cash advance” or “check advance” loans — are high-interest loans that give borrowers instant cash in return for a portion of their next paycheck. Because they revolve around a payday, these are short-term loans that only fund small amounts, around $500 or less [*].

While payday loans are legal in many states (16 states, including New York have outlawed them), they aren’t necessarily ethical or safe.

Besides charging sky-high interest rates, payday loans don’t require any collateral, meaning they are unsecured. Many payday loans also contain hidden provisions that force borrowers to pay extra fees that they didn’t know about before they signed on for the loan.

Scammers are also attracted to payday loans because people applying for them are financially vulnerable and may be more susceptible to lender impersonation scams.

Here are some of the dangers and risks of payday loans — whether offered by legitimate lenders or scammers: 

• Sky-high interest rates mean you could end up owing more than you take out. In the United States, average payday loan interest rates range anywhere from 36 to 600+%! This means that a small loan can end up costing you hundreds or even thousands of dollars more — even if you pay it back on time. 
• Shady repayment plans could leave you stuck paying off loans for years. Repaying your loan more slowly means you’ll end up paying more money in interest. If you get behind on your payments and you’ve given a lender access to your bank account, they may attempt to extract whatever money is in your account, triggering hefty bank overdraft fees.
• You may be tricked into paying in advance for bogus loans. Fraudsters posing as payday lenders may ask for an advance payment and then disappear without giving you a loan. 
• Your personal information could be used for identity theft. If you submit a loan application containing financial information or personally identifiable information (PII), fraudsters can use your Social Security Number (SSN) to open other lines of credit, obtain a fraudulent driver’s license, or commit crimes in your name.
• Identity thieves could take out fraudulent payday loans in your name. When they don’t pay them off, you’re left to pay the remaining debt and any corresponding fees.

The bottom line: Payday loans aren’t always illegal — but they’re rarely a safe bet. If you need to take out a payday loan or are concerned that scammers may be taking out loans in your name, consider signing up for an identity and fraud protection service.

The 5 Latest Payday Loan Scams You Need To Know About

What is the first step in preventing payday scams? Learning to recognize them. Here’s how to identify and avoid five of the most common payday loan scams:

1. Identity thieves taking out payday loans in your name

Identity thieves are almost always financially motivated and can use your stolen information to take out loans or open new accounts in your name. Payday loans are especially dangerous — as they rarely show up on your credit report, and, therefore, won’t be caught by a credit monitoring app or service.

How to tell if someone has taken out a payday loan in your name:

• Sign up for an identity monitoring service. Aura’s award-winning app monitors your personal information — including your full name, address, and SSN — and can warn you in near real-time if your data has been used for payday loans or other risky transactions. 
• Don’t ignore strange debt collector notices or calls. In the United States, debt collectors are legally obligated to share with you the name of the creditor and the amount that you owe. If you don’t recognize the debt, ask the collector to send you a written validation notice — and dispute the debt immediately.

2. Fake debt collectors posing as payday lenders

Last September, a man in Utica, Michigan was being hounded by debt collectors. They claimed he owed money on a small loan from ten years prior — and if he didn’t pay up, he’d be served legal papers [*]. Eventually, the man gave in, paying what the collectors said he owed: a flat $500 fee and weekly payments of $100. But the whole thing was a sham. 

Fraudsters have recently begun masquerading as debt collection agencies and law firms, calling consumers and telling them they owe money to payday loan companies [*]. Although real payday lenders have no affiliation with these firms, frazzled consumers pay up, and scammers pocket their money.

If you receive a call from an unfamiliar debt collector:

• Ask for information about your “debt.” The Fair Debt Collection Protections Act requires debt collectors to share a creditor’s name and address, the amount you owe (plus fees, interest, and credits), and your debt collection rights [*]. Just asking for that information may be enough to spook some scammers.
• Check for an online presence. Grifters running debt collection scams may be clever enough to send you a fake debt collection document to support their claims. See if you can find the debt collector and lender’s websites, and make sure they are registered in your state. Cross-check with payday state law any debt collection mail that you receive. In some states, like California, the maximum amount a consumer can borrow in a payday loan is only $300 [*].
• Request a copy of your credit report. Every American is entitled to free weekly credit reports from all three bureaus — Experian, Equifax, and TransUnion — by visiting AnnualCreditReport.com. If you don’t see the supposed “debt” on one of your reports, you’re likely the victim of a scam.

💡 Related: How To Prove a Debt Isn’t Yours (And Dispute It) →

3. Predatory loan rates and payback policies

Earlier this year, CNBC reported that 70% of Americans say they’re stressed about their personal financial situations, prompting them to turn to personal loans to cover rent, groceries, and gas [*]. But many payday lenders engage in harmful practices that saddle consumers with even more debt. 

In one of the most infamous payday lending schemes, a loan shark in Kansas City charged interest rates as high as 1,000% for nearly 15 years before he was caught [*].

Signs you could be a victim of predatory lending:

• The loan was shockingly easy to obtain. Predatory lenders want to give you loans, knowing they’ll be able to make a huge profit off of the interest payments. Be cautious if a loan is provided nearly instantly, or if you were told that you qualify for a larger loan than you asked for (or a loan you can’t afford).
• The lender keeps pressuring you to refinance or extend your loan. Every time you do, steep fees get tacked on to your bill, ballooning your debt to an amount that’s impossible to pay back. A study conducted at Vanderbilt University found that ridiculously high interest rates, unnecessary fees, and unfair repayment contracts double the rate of personal bankruptcy [*].
• You’re not building credit. On-time payments should increase your credit score, qualifying you for better financial products. If you’re denied a new credit card or other lines of credit, the lender may not be appropriately reporting your payments to all three credit bureaus.

💡 Related: What Is Loan Fraud? How To Protect Your Financial Assets →

4. Calls, emails, or texts offering loans or debt protection

Some scammers take a different approach by posing as government agencies “extending financial relief,” or as credit repair providers that can instantly boost your credit score for a low price.

In all cases, these offers are too good to be true. No legitimate company will demand an advance fee for a loan [*]. And even if an unsolicited offer isn’t a scam, it may come with exorbitant interest rates and multi-year loan terms that destroy your credit [*].

How to identify a fake loan or debt protection scam:

• You’re contacted out of the blue about a “special offer.” Scammers make millions of phishing attempts every day via emails, texts, and calls. If someone contacts you claiming to offer special rates on loans or debt reduction, it could be a scam. 
• Scammers use names that sound like legitimate organizations. To build trust, fraudsters use genuine-sounding names, such as Credit National Assist. Always research an organization before sending them money or providing any personal information.
• They guarantee to increase your credit score or remove debts. No company, agency, or individual can guarantee that they can increase your credit score or get rid of debts. These empty promises are clear warning signs of a scam. 

💡 Related: How To Tell If Someone Is Scamming You Online →

5. Requests for upfront payments to cover “fees” on your payday loan

Scammers prey on the disadvantaged, and pretend to be generous lenders who just need upfront payment for “insurance” or to “demonstrate good faith.”

In San Jose, a woman named Shirley received one of these offers via phone call — claiming she’d qualified for a $5,000 loan. To take advantage of the offer, all she needed to do was pay an upfront fee of $535 [*]. A few minutes later, the representative explained that because Shirley had bad credit, they couldn’t secure the loan without an additional $535 fee. At that point, she became suspicious and looked up the company — it was fake.

How to avoid “advance fee” fraud from fake payday lenders:

• Never pay in advance for loans or other financial services. It’s illegal for companies to charge upfront for loans or debt protection. If a lender or so-called financial institution is requesting payment before providing a loan or service, it’s a scam.
• Be cautious with alternative payment options. Fraudsters often ask for payment via gift cards, wire transfers, or apps like Zelle, Venmo, and Cash App because they’re hard to trace and even harder to reverse.

How To Tell If a Payday Loan Is a Scam

It can be tough to know for sure if you’re being scammed, but there are several warning signs that could indicate fraud.

Here’s what to look out for when applying for a payday loan:

• Upfront fees. Any request for payment before providing debt relief services is illegal and should be viewed as a huge red flag indicating a scam.
• Demands for personal information. Never share your personal data over the phone. Scammers phish for data that they can use for identity theft.
• Look-alike names or URLs. Fake loan sites offer easy ways for scammers to swipe your personal information or install malware on your computer. Examine links closely – look for slight misspellings or extra hyphens. Spam sites may display old logos, have oddly placed links, or use fonts that are inconsistent with other company materials.
• Unsolicited calls, texts, or emails. Data brokers collect and sell your email address and phone number to marketers, but they may also sell it to scammers. In the wrong hands, your contact information can fuel phishing attempts that compel you or your family members to disclose credit card numbers, bank account information, or other valuable personal details.
• Unclear terms and interest rates. Legitimate companies should be willing and able to walk you through all of the terms of your loan offer, and explain how they calculate your interest rate.
• Asking to “test” your bank account numbers. Scammers say they’re establishing a “secure connection” by sending you money and then having you send the same amount back. Here’s the catch: they don’t send you any money. Once you’ve sent your payment, you won’t get it back.

The bottom line: Trust your gut. If something feels off about a lender, move on and look for other options. Fraudulent or malicious lenders will only do damage to your credit score, finances, and identity. 

Did Someone Take Out a Payday Loan in Your Name? Do This!

Here’s what to do if you discover that someone took out a fraudulent loan in your name:

Gather evidence

Documenting proof of the scam makes it easier for law enforcement to investigate your case and increases the likelihood of recovering stolen funds. Examples of what to collect include: 

• Spam site URLs
• Phishing text messages or emails
• Overdue notices, mail, or voicemail messages from debt collection scammers
• Your credit card statement
• Your credit report

Secure your identity and financial accounts 

First, change your passwords. Then, use official customer support numbers to contact your banks and lenders. Let them know you’ve been the victim of identity theft. They will guide you through steps to protect, or even close, your accounts.

You should also consider contacting all three credit bureaus to freeze your credit. Freezes restrict access to your credit report, stopping scammers from opening new accounts with your name and SSN. You can do this manually, but signing up for a credit monitoring service will automatically alert you to suspicious activity on your credit report and assist you in initiating credit freezes.

Need more help? Here’s an in-depth list of identity theft victim assistance resources →

File a police report 

This step may feel unnecessary — especially if the scam took place online. But having an official police report may be required when disputing inaccuracies on your credit report or when asking vendors to void charges on your credit card.

Report the scam to federal agencies 

By contacting the proper authorities, you increase the chance that fraudsters are caught, and you can help prevent others from falling victim to similar identity theft scams.

Cases of identity theft are investigated by the Federal Trade Commission (FTC). To start a report, visit ReportFraud.FTC.gov and select the “Credit, Debit, Loan” category. Provide as much detail as you can about the person who contacted you, any payments you made, or links you visited. You’ll need to enter your SSN, birthday, military status, and other personal information to verify your identity.

To report a fraudulent payday loan organization or business, file a complaint with the Consumer Financial Protection Bureau (CFPB). They can work with your state’s attorney general to take legal action.

Try to get your money back

If scammers used the payday loan to make fraudulent purchases, reach out to each company’s support team and ask that the charges be dropped. Be willing to share copies of your police report along with reports you submitted to the FTC or CFPB to legitimize your claim, and any other supplemental evidence that can help them process your request.

💡 Related: Do Banks Refund Scammed Money? What You Need To Know →

The Bottom Line: Scammers Will Do Anything To Get Your Money

Payday loans present significant risk — whether they’re offered by predatory “legitimate” lenders or scammers and identity thieves taking out loans in your name.

Choosing an accredited lender, monitoring your credit, and securing your financial accounts all play critical roles in keeping your finances and identity safe. But it’s impossible for anyone to remain vigilant 24/7/365. 

Aura’s number-one rated digital security solution keeps a watchful eye on all of your accounts for you, providing real-time alerts of any suspicious activity — including new loans in your name. Besides providing the fastest fraud alerts on the market, Aura offers 24/7 three-bureau credit monitoring, always-on U.S.-based customer support, and a $1 million identity theft insurance policy for every adult on your plan.

Don’t give scammers an easy payday. Try Aura free for 14 days.