Dealing With Payday Loan Scams in California: A Guide

Payday loans are a simple tool meant to ease short-term financial burdens. If you go over budget in a given month due to factors outside your control, a payday loan can help you make ends meet until your next paycheck, at which point you pay back the loan plus interest.

Millions of Americans use payday loans every year. This prevalence has led many scammers to adopt new tactics to exploit those looking for payday loans. To fight these scams off, it's important to understand what separates a legitimate lender from a scammer and how to protect yourself from the latter.

Types of Payday Loan Scams

Some common payday loan scams in California include:

• Phantom loans: The scammer sends you a message that claims you owe a fee for a loan you never took out.
• Fake lenders: The scammer impersonates a legitimate lender.
• Loan flipping: The scammer encourages you to take out more loans to pay off existing loans.
• Unlicensed lenders: The scammer offers loans without proper licensing from the state of California.

How to Verify if a Lender Is Legitimate

Part of recognizing scams is knowing what makes a lender legitimate. Below are some steps you can take to verify a lender and protect yourself from scams.

Research Lenders

In California, payday loan lenders must have a license from the Department of Financial Protection and Innovation (DFPI). This license means that they must adhere to the standards set by the California Deferred Deposit Transaction Law (CDDTL), one of the many California laws on payday loans. As a borrower, you should always verify a lender's license through the DFPI's search page before taking out a loan. You should also see if the DFPI has taken any enforcement actions or orders against the lender.

Review Credibility

Social proof is an excellent way to evaluate a lender. Try to find testimonials or reviews for the lender online. As you read, pay special attention to negative reviews. These can help you identify common issues other borrowers have and see if they're a pattern.

Reviews can be manipulated, however, so you should also see what the Better Business Bureau (BBB) says. There, you can find certifications and the lender's BBB ranking. These resources can better equip you to make healthy, informed choices about who you partner with.

Contact the Lender

In this day and age, legitimate lenders will have a website. You can use the information there to evaluate the lender's credibility. Be cautious if you notice strange details — odd formatting, inconsistent spelling or nonexistent contact information. These can be signs that the lender is trying to scam you.

If the website passes the eye test, you can contact the lender to verify terms and prices and ask questions. As a borrower, it is vital to know what you're getting into before taking out a loan. Talking with the lender can help you make that decision.

How to Protect Yourself From Payday Loan Scams

Now that you know how to verify a lender, let's look at some other practices to safeguard you from scams. You can employ these habits to protect your emotional and financial well-being in the face of suspicious loan offers.

Understand the Terms and Conditions

The first and perhaps most important thing you can do is pay attention. Before signing anything, read the terms and conditions and make sure you understand what they mean. If you don't know how interest or an annual percentage rate works, predatory lenders can take advantage of you. Staying informed is your first line of defense.

Avoid High-Pressure Tactics

The second thing you can do is take your time. If a lender is pressuring you to make a decision quickly, they should not be trusted. They are most likely trying to manipulate you, but remember, you are ultimately the one making the decision. If a lender bombards you with deadlines and legal threats, take a moment to recognize what they're doing and breathe. The worst thing you can do in this situation is panic and make the decision the scammer wants you to.

Keep Personal Information Secure

Another way to protect your money is to secure your personal information. Scammers are adept at “phishing,” where they send a message inviting you to click a dangerous link. For instance, you might receive a text saying your Amazon package will be delivered once you click a link and put in your address. Clicking the link actually allows the scammer to steal your information or download malicious software onto your phone. Scams like these stole around $330 million from American consumers in 2022.

When presented with messages like these, double-check the fine print. Company emails have very specific and intentional formatting. Checking things like the email address and the URL for anything suspicious can help you spot people trying to steal your information. As a baseline, you should always be suspicious of any link or message sent to you from an unknown source.

What to Do if You Encounter a Loan Scam

If you've become the victim of a scammer or suspect that you're in contact with one, don't panic or feel ashamed. These things can happen to anyone, no matter how smart or prepared they are. All you can do now is fight back.

Start by ceasing communication with the lender and refusing to make any more payments. Document all the interactions you've had with the lender so that you can refer back to them later.

Once you've gotten everything together, it's time to report the scam. According to the Federal Trade Commission (FTC), less than 10% of fraud victims actually report the fraud, which allows scammers to get away unscathed and puts more people at risk. In California, you can submit a complaint to the DFPI. Outside California, you can contact your local law enforcement. Wherever you are, you can file a report with the FTC.

The last step is to protect yourself from future harm. Contacting a financial counselor or credit counseling service can help you defend your identity and money if they've been compromised. In some cases, you may even be able to pursue legal action against the scammer.

Frequently Asked Questions

To give you additional information and peace of mind, we'll answer some common questions about payday loan scams.