How to Identify Payday Loan Fraud

Payday loans can be a convenient and quick means to acquire a fast, short-term loan.

These loans often serve as a giant helping hand to those facing unexpected expenses.

Unfortunately, payday loan customers also attract unscrupulous individuals who try to take advantage of individuals when who are in need.

For this reason, it is important for consumers to recognize the signs that a payday loan lender might be fraudulent.

How Payday Loans are Supposed to Work

Payday loans serve as short-term loans designed to be repaid by the borrower's next payday, generally within 14 to 31 days. Borrowers provide either a check or their bank account information to the lender. The lender then provides the loan in one of three ways: actual cash, a prepaid debit card or deposited directly into the borrower's account.

The borrower will pay a finance charge for the loan - typically 10 percent to 25 percent of the total loan amount. This finance charge is actually the loan's annual percentage rate, or APR. The higher the APR, the more interest the borrower will need to pay.

When the payday loan is due, the borrower generally will need to repay the loan in one lump sum, including any finance charges, versus paying off the loan in a series of payments. The borrower typically will have the option to extend the payday loan, but this step will result in additional fees and a higher APR.

The process, including the repayment terms and finance charges, should be outlined clearly for you, and if you do not understand any part of the process, you should not hesitate to ask the lender to provide additional insight. A reputable lender should have no problem assisting in your understanding.

Signs of Potential Payday Loan Fraud

When it comes to finding a legitimate payday loan lender, there are specific signs that indicate potential fraudulent activity.

Sign 1: Guaranteeing approval for the loan. While payday loans lenders do tend to have more relaxed qualification requirements compared to other loans, you do still have to qualify for the loan.

Sign 2: The payday loan lender requires an up-front fee. Reputable payday lenders rarely charge any up-front fees, including application fees.

Sign 3: The payday loan rates seem too good to be true. While shopping for a payday loan lender, you will find some variances in the rates offered but if a lender's rates are significantly lower than other stores, there might be planning to get your money another way.

Sign 4: The payday loan lender is not asking for the right information. A lender will need to obtain information about you in order to process the loan. However, if it seems like the lender is asking for a ton of information but is not worried about your source of income, chances are the lender is not legit.

Sign 5: The payday loan lender's web site does not contain valid contact information. You should be able to easily access a lender's phone number, physical address and email address on its web site.

Sign 6: The payday loan lender is not upfront about the terms of the loan. The federal Truth in Lending Act requires that all payday loan lenders disclose all terms, including the APR, of a loan prior to finalization of the loan agreement.