A Payday Loan is a short term personal loan offered by lenders. It is called a ‘payday’ loan because you are expected to pay it all back on your next payday. Even though payday loan interest rates are high, lenders will have their own strict eligibility criteria. They assume a higher risk on these loans than a bank or credit union. This means they can be quite an expensive way to borrow.

Many people are interested in taking payday loans for their short term needs. This has meant that loan scammers have started to pretend to be legitimate lenders. This has given rise to the cases of payday loan fraud in the UK. Here we’ll help you understand what the common payday loan scams are and how you can avoid being a payday loan scams target.

Check out the advantages and disadvantages of payday loans here.

What are payday loan scams?

When a scammer pretends to be a payday loan lender to extract money or personal information from another person, the fraud is called a payday loan scam. Fraudsters contact individuals who are desperate for money through emails, messages, or payday loan scam calls and pretend to offer them payday loans.

Once the person is lured by their offer, they try to extract debit card numbers, bank account details, or other financial information from the person. Later, this information is misused to steal the person’s money or identity.

Payday loans themselves are not scams. You can get these loans from a legitimate lender. If in doubt, check the Financial Conduct Authorities register to see if the lender you’re considering is a legitimate company.

Here are 7 warning signs that you should look out for whenever someone contacts you for a payday loan.

Warning signs to spot a payday loan fraud

1. Requesting upfront fees

Upfront fee fraud is one of the most common types of loan scams. Unfortunately, it’s growing year on year. The data released by the Financial Conduct Authority (FCA) revealed that the complaints about advance fee fraud increased by 26% in 2022 compared to the previous year.

Under this scam, the fraudsters promise a guaranteed payday loan if the victim sends them an upfront fee. Once the victim sends the money, the fake payday loan company disappears.

If your payday lenders are asking you to pay an upfront payment as a loan fee, be cautious. No legitimate lender will ask for a fee in advance. These fees are generally deducted from your loan amount.

2. Asking for excessive personal information

If your payday loan company asks about your mother’s maiden name, your partners bank account, the street you grew up on… Beware! Legit lenders do not ask for this kind of confidential information. Note – they will likely need to know your bank account for example (so they can pay you the money).

3. Unsolicited communication

Be cautious about any unsolicited communication from banks or other payday lenders. Legitimate lenders rarely reach out randomly to offer a payday loan. Be especially careful if the payday loan website claims you’re pre-approved. If you have been offered a payday loan over the phone without asking for one, you could be dealing with payday loan fraud. Avoid agreeing to any such offer until you have verified the identity of the lender.

4. Use of unusual payment methods

Payday loan scammers often request upfront fees or other advance fees through unusual channels. They may ask you to send them payment through a gift card, a payment transfer app, or wire transfers. Real payday loan companies will not ask for payment via a gift card.

They insist on using these payment methods because it is almost impossible to trace the sender in such transfers. Do not transfer your money through such payment modes to avoid payday loan scams.

5. Insufficient information about the lender

In the UK, all direct lenders MUST share all their company information on their site. If they don’t do this, they could be scamming you. For instance, the email could mention only the company’s name, but not the physical location. Or the company’s website could be flagged unsecured by your browser. These are possible signs that indicate that you have become a victim of a payday loan collection scam.

Whenever you hear from a payday loan company, check their websites, apps, or other online presence to ensure that they are a real company.

6. Offering loans with unrealistic terms and conditions

Is your payday loan lender offering you a loan with surprisingly lenient conditions? Keep in mind that if something seems too good to be true, it probably is! Payday loan scams often lure people by promising guaranteed approvals, nominal interest rates, no credit history checks, etc.

It’s crucial to be familiar with current interest rates and terms and conditions offered in the payday loan industry. By gaining this knowledge, you can easily spot a scammer making unrealistic offers.

7. Demanding immediate action

Scammers try to create a sense of urgency. They use terms like limited period offer. They simply want you to act on your instincts without exercising caution. Borrowers get trapped in the scheme by acting immediately without doing their research first.

Strategies to avoid payday loan scams

1. Check your lender’s FCA authorisation

All lenders in the UK need to have an FCA authorisation to provide consumer credit. If a lender you are not familiar with, has offered you a payday loan, you can check their FCA registration to ensure that they are a legitimate company.

If you suspect that your lender is not legitimate, check whether their name appears on the warning list. The Financial Conduct Authority (FCA) has created a warning list of unauthorised financial firms that are not allowed to lend money in the UK.

It’s always advisable to take a payday loan from a lender that you trust. Here’s a detailed guide on how to get accepted for a payday loan.

2. Research the lender online

Take some time to do thorough research about your lender online. Browse through their website to see if they have mentioned their FCA registration number and their physical address.

While checking their website, do not click the link provided in the communication sent by them. Locate the website using a search engine to ensure that it is legitimate. You can also visit third-party websites to check customer feedback. Check whether your lender has social media pages and see if they are active there. A legitimate lender is likely to have a verified social media account with considerable following.

The safest way is to take payday loans from well-known and trusted lenders. It’s better not to rely on lenders who reach out to you through phone calls or unsolicited emails.

3. Review your lender’s communication for warning signs

The emails sent by payday loan lenders can have a bunch of warning signs. For instance, the sender’s email ID could be different than the lending company’s name. Occasionally, the language and sentence structure of the email would not be formal. A scam email could also have grammatical errors.

4. Beware of look-alike websites

Scammers often create websites that look similar to the original website of a well-known bank or lending company. Make sure that the spelling of the company’s name matches exactly with the one mentioned on the website.

Avoid clicking on the website link mentioned in the email offering the payday loan. Instead, visit the bank’s website from a secured browser.

Many lenders have started to create awareness about such fake websites. You may have seen a pop-up on the websites of banks and lending companies, asking customers to be cautious of these fake websites.

How to deal with payday loan fraud?

If you are still in touch with the scammer, avoid any further financial transactions with them. Cancel any payment made to them immediately by contacting your bank. You can contact the Financial Conduct Authority through their consumer helpline if you wish to report clone companies or unauthorised lenders.

If you have been the victim of a payday loan collection scam, or if you have received a payday loan scam call you can report it to Action Fraud, the national fraud and cybercrime reporting centre.

Bottom line

Technology has allowed the lending industry to grow by leaps and bounds. The entire process of taking a loan can be completed online or over the phone. But technology has also made it easier for scam companies to trick people and steal their money.

Payday loans scams are particularly risky because the possibility of getting an easy payday loan often lures even the most cautious people. Borrowers should always take payday loans after doing extensive research about current interest rates and terms and conditions generally offered by lenders. Remember- it’s better to be safe than sorry.

Frequently asked questions

Disclaimer: The information given above is provided for reference only. This is not financial advice.

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Short Term Loans vs Payday Loans: Key Differences