Updated
Oct 31, 2019 Key Points
- Payday loans are short-term loans, usually in small amounts
- There are brick-and-mortar payday loan providers and online vendors
- Scammers target people who have applied for a payday loan, even if they didn’t actually borrow the money
- There are red flags to recognize to avoid being scammed
Payday Loan Collection Scams
A payday loan is a fairly broad term, but generally, it’s a loan of $500 or less and is a short-term, expensive lending product. Different laws in each state determine how people can obtain payday loans and what the lending guidelines are.
How payday loans typically work is that the borrower receives a small amount of short-term cash, and they’re then responsible for paying it back on their next payday or within a short window of time.
To pay back these loans, most companies require the customer to authorize an automatic electronic debit, or the borrower may post-date a check for the full balance and fees and give it to the lender before they receive funding.
Payday loan scams are occurring when it comes to collection practices, however. Sometimes, even if someone applies for a payday loan or submits their information to a company, they’re then targeted by scammers who say they need to repay a loan they never got.
These scammers get very detailed information about people, such as their name, date of birth, and even social security number. They get this information because payday loan companies sell applicant information to third parties. That’s why it can be so difficult to spot these scams. Unfortunately, many people will think that if the person calling has such detailed information about them, they must be legitimate.
Red Flags of a Payday Loan Collections Scam
The following are some indicators that the person calling you about a payday loan could be a scammer:
Threatening With Arrest
When payday loan scammers call people, they want to scare them and intimidate them into paying a debt they don’t really owe. Often, one of the biggest red flags of a debt collection scam is the collector threatening to have the victim arrested – which is illegal even for legitimate debt collectors.
Scammers might also say things like they’re going to send a law enforcement officer to the home of the person if they don’t pay what they “owe.” And in some cases, these scammers may even pretend to be law enforcement when they make a call.
Threatening With a Lawsuit
A collections scammer might call someone and threaten to take legal action such as filing a lawsuit against them if they don’t pay their supposed debt. Specifically, along with threatening a lawsuit, scammers may say they’re calling from a local courthouse.
Threatening to Tell Family, Friends, or Employers
The goal of a scammer in these situations is to make someone so afraid that they pay whatever is being demanded. As part of this, a scammer might say they’re going to tell friends and family that you owe this money or tell your employer. None of these things would be something a legitimate debt collector could or would say.
Demanding Immediate Payment
If someone calls and demands that immediate payment is made, such as through Western Union or a similar service, it’s almost guaranteed that it’s a scam.
Tips to Avoid Becoming a Victim
The following are some things to know regarding your rights and how to avoid becoming a victim of one of these payday loan collection scams:
- If you do receive any calls, you should ask for a written validation notice. A validation notice has to include the amount of the debt, the name of the creditor, and a description of your rights as outlined by the Fair Debt Collection Practices Act
- You should ask about the debt you supposedly owe—if the person on the phone refuses to provide you that information, it’s more than likely a scam
- No matter what a caller says, don’t provide them with personal or financial information
- Most states require debt collectors to be licensed, so ask for their professional license number as well as the name of the company they’re representing
- If you believe you’ve received an illegitimate debt collection call, submit a report with the Consumer Financial Protection Bureau
Bottom Line
In many cases, if you’re submitting your personal information to an online company for a payday loan, you may be the victim of a scam even if you don’t actually take out the loan. Be aware of the potential for your information to be sold to third parties, and also know the red flags and what to watch to prevent becoming a victim from potential payday loan collection scammers in the future.