Life can be expensive. Maybe you overspent over the holidays and are now having trouble paying your bills. Or perhaps you had an unforeseen emergency and need help making payments. If that’s the case, the ads promising fast, easy cash that are all over the radio, TV, and Internet may be tempting. But these “payday loans” often come with large fees and high interest rates.
Payday loans, also called cash advance loans, check advance loans, post-dated check loans, or deferred deposit loans, are small, short-term, high-rate loans offered by check cashers, finance companies, and others. They generally work like this: you borrow some money and pay it back, with a fee, when you receive your next paycheck. This can be done with checks or through your bank account. You can also usually pay more to extend the loan.
If you do need a short-term loan, make sure to borrow responsibly:
- Watch out for scams. Consumers nationwide reported more than 1,000 advance fee loan scams to BBB Scam Tracker in 2017. The median dollar lost was $600, 39% of reports involved a monetary loss, and the most common payment method was a prepaid card. In this scam, you’re promised a loan no matter how bad your credit history is – you just have to pay an upfront fee first. Unfortunately, once you pay the fee, the loan never comes. A San Francisco woman reported to BBB Scam Tracker that she lost $300 to this scam last August; she was asked to pay with an iTunes gift card due to her low credit score. For more information on advance fee loan scams, visit org/loanscam.
- Research the lender. In 2017, consumers nationwide filed around 1,200 complaints against payday loan companies with BBB. However, things may be getting better. Consumers filed around 1,700 complaints in 2016 and more than 2,200 complaints in 2015. Make sure to research businesses at org to see their BBB Rating, Customer Reviews, and complaint history.
- Verify licensing. It’s also vital to check licensing – lenders must be licensed by the California Department of Business Oversight (DBO). You can search licenses here. According to CA DBO, “when consumers do business with unlicensed lenders… they’re less likely to benefit from the protections provided borrowers by state law… [Which] include limits on the dollar amount of payday loans and the fees consumers can be charged, as well as requirements that lenders provide borrowers important information about loans.” For more information from CA DBO on lender licensing and requirements, and how payday loans work, click here.
- Be careful looking online. The Federal Trade Commission (FTC) notes that “in recent years, the availability of payday loans via the Internet has markedly increased.” However, some of these Internet lenders use deception and break the law to take advantage of consumers. Internet payday lenders may be hard to locate and contact, and can make loans without complying with licensing requirements or other protections. Completing loan applications online may also lead to identity theft.
- Know how to deal with debt collectors. If you have taken out a payday loan in the past, you may be targeted by debt collection scammers and illegal debt collectors. In a debt collection scam, scammers harass you trying to get you to pay a debt that you don’t even owe. Consumers nationwide reported around 2,300 of these to BBB Scam Tracker in 2017. The FTC notes that even if you do owe debt, “some collectors harass and threaten consumers, demand larger payments than the law allows, refuse to verify disputed debts, and disclose debts to consumers’ employers, co-workers, family members, and friends.” Tips for dealing with debt collectors can be found on the FTC’s website and at org/debtcollectionscam.
- Consider your alternatives. Before taking out a payday loan, the FTC suggests considering your options, which include: borrowing from your credit union or a small loan company; shopping for the lowest cost credit offer; contacting your creditors or loan servicer; working with a local consumer credit counseling service; making a realistic budget; and enabling overdraft protection. BBB’s Financial Building Blocks, which offers tips for managing and reducing your debt and also includes a free debt solution tool, may be able to help. You can also visit bbb.org/loans and go.bbb.org/debtoptions for more information.