The Better Business Bureau conducted an investigation study regarding predatory payday loans, which paved the way for scammers amid the COVID-19 pandemic.
Payday loan laws are managed state by state among the 32 states in which they are available, and regulations make the impact of the industry in the United States and Canada difficult to track.
The BBB study, however, found a common thread in the triple-digit interest rates that many of these loans carry – camouflaged by interest compounded weekly or monthly, rather than annually, as well as significant rollover fees.
From 2019 to July 2022, BBB received nearly 3,000 customer complaints about payday loan companies, with a disputed dollar amount of nearly $3 million. In addition, over 117,000 complaints have been filed against debt collection companies at BBB. Complainants often said they felt ill-informed about the terms of their loans. Many fall into what consumer advocates call a “debt trap” of racking up interest and fees that can force customers to pay double the amount originally borrowed. A St. Louis, Missouri woman recently told BBB that over the course of her $300 loan, she paid over $1,200 and still owed an additional $1,500.
During this time, BBB Scam Tracker received over 7,000 reports of loan and debt collection scams representing approximately $4.1 million in losses.
Posing as payday loan companies and debt collectors, scammers use stolen information to trick consumers into handing over their bank account information and money. BBB discovered that hackers had stolen and released detailed personal and financial data for more than 200,000 consumers.
Federal regulators have passed tougher laws to combat predatory lending, but those regulations have been rolled back in recent years, leaving states to set their own rules on interest rate caps and other aspects of payday loans. . More than a dozen states introduced legislation last year to regulate payday loans, but the landscape of legally operating payday lenders remains inconsistent across states.
Currently, payday loans are not allowed in 18 states. In addition, the Military Loans Act sets a rate of 36% on certain payday loans. When it comes to fraudulent behavior, law enforcement is limited in what they can do to prosecute payday loan scams. Some legal payday lenders have attempted to prevent scams by educating consumers about the ways in which they will or will not contact borrowers.
The BBB study advises consumers to thoroughly research all of their borrowing options — as well as the terms of a payday loan — before signing anything for a short-term loan. The study also includes recommendations for regulators:
- Cap consumer loans at 36%
- Educate more people about no-cost extended repayment plans
- Require lenders to test whether consumers can repay their loans
- Require Zelle, Venmo, and other payment services to offer refunds for fraud
Where to report a payday loan scam or file a complaint:
Find more information about this study and other BBB scam studies at BBB.org/scamstudies.