The Federal Report on the Economic Well-Being of U.S. Households in 2018 found that 4 out of 10 adults would have trouble paying an unexpected $400 expense, like a car repair. This would lead them to borrow from friends of family, put it on a credit card, sell something, get a bank line of credit, get a payday loan, or, as 12 percent of respondents said, they “would not be able to pay for the expense right now” by any means.
While this figure is up from 5 in 10 adults in 2013, it still shows that a large percentage of Americans are left to grasp at straws when they need unexpected cash.
Half of American adults either don’t have a credit score or have subprime credit. That stinks, but it stinks even more when you have an unexpected bill to pay.
In this article, we are going to talk about red flags to avoid when vetting payday lenders in an emergency.
First, how bad is a bad credit score?
“Having a credit score at or below 500 makes qualifying for loans incredibly difficult,” says Jared Weitz, CEO and Founder of United Capital Source Inc. “It is at this score range where payday loans become the only option.”
For people who don’t have access to mainstream credit, or a family member with the means to lend them $400, payday loans are often the only viable option in an emergency situation.
To help our readers choose a safe and trustworthy payday lender or payday alternative, we asked personal finance experts for advice. Here are the red flags they want you to look out for:
1. Online only lenders
“They’re only available online. Most payday lenders will have brick-and-mortar stores. There are very few online-only payday lenders that are legitimate businesses.“ — Patricia Russel, CFP, FinanceMarvel
2. Loan amounts
“They offer you a loan for your full paycheck. You want to avoid this because then if anything comes up at all, like you need to buy food or put more gas in your car, then you won’t be able to repay the loan in full. Because of high interest rates on payday loans, you can end up struggling for years to pay back this loan that continues to grow.” — Russel
3. Upfront payment
“A major red flag for working with a bad or scamming lender is if you are requested to pay an upfront fee in order to process your loan. If you receive a payday loan collection call, this is a concern with either a lender you are working with in the past or one you are looking into. The caller may begin to request collection for a payday loan you have and might even be able to share personal information with you as verification. Pay attention to this and be sure to vet out a potential lender by checking websites and customer reviews for feedback.” — Weitz
4. Not stating the APR
“Because payday loans are so short term, they typically offer you a ‘fee’ without stating the APR. It makes the number sound more reasonable. When you don’t know the percentage, you don’t realize that it’s several hundred percent. This will matter a lot if something happens and you can’t repay the loan in full on time. That percentage will make the amount grow and grow until you’re in a hole you can’t climb out of. Avoid any interest rate in the triple digits.” — Russel
5. Last minute fees
“It is normal to be charged a higher interest rate because you have a bad credit score. It’s not normal to be charged ‘fees’ for a poor credit score. Some lenders will even add these fees on at the last minute, claiming they were mistaken, and you didn’t qualify for the product you came in to sign a contract for. Don’t fall for this.” — Russel
6. Misleading information
“If they lie to you about anything, or ask you to lie about anything, run away. It doesn’t matter how small it seems, find another lender. They could ask you to lie about how much money you make on your application, or they could keep brushing away mention of fees without giving you direct answers. Don’t play these games, it means something predatory is going on.” — Russel