When you’re dealing with medical bills not covered by your insurance or car repairs not covered by your warranty, sometimes a personal loan has you covered. You could even use a personal loan for a non-emergency such as a home improvement project.
However, you should always be on the lookout for fraudulent lenders. Personal loan scams specialize in taking advantage of situations when people need money and then taking their unfortunate customers for a ride.
The good news is that loan scams raise a number of unmistakable red flags. Here’s what you need to know to recognize the fakes and frauds from a mile away.
7 signs that a lender may be a scammer
Search for personal loans online and you may well run across a few loan scams. Although it can be hard to distinguish them from legitimate lenders making genuine offers, just remember the seven signs of a potential loan scam.
1. The lender isn’t interested in your payment history
One of the upfront disclosures you should see is the requirement to pull your credit report before lending you money.
Reputable lenders make it clear that they’ll need to look at your credit, sometimes getting reports from all three major credit bureaus (Equifax, TransUnion and Experian). They need to know whether you have a history of paying bills on time and in full, which offers them some assurance that you’ll be just as diligent about repaying a loan.
On the other hand, the operators of loan scams aren’t really interested in timely repayment. They tend to do the opposite, seeking high-risk borrowers who are likely to fall behind on loan payments and, as a result, incur their excessively high late fees and penalties.[COMPARE: Loan rates on Bankrate]
2. The lender isn’t registered in your state
The Federal Trade Commission (FTC) requires that lenders and loan brokers must register in the states where they conduct business. If a lender you’re interested in does not list any states, you could be dealing with a loan scam.
Check the lender’s website to verify a list of states where it legally conducts business. If you don’t find it, contact your state attorney general’s office for further verification. Lenders also must operate under a bank charter, so look for that information on the lender’s website as well.
3. The lender demands a prepaid debit card
Some scammers will require you to provide a prepaid debit card, claiming they need it for insurance, collateral or fees. Legitimate financial institutions may charge a fee for your application, appraisal or credit report, but those charges are deducted from your loan.
A prepaid debit card can be a useful tool for personal loan scams. It’s virtually as untraceable as cash, and good luck reporting it as stolen if you’ve voluntarily given it to a scammer.
4. The lender calls, writes or knocks
Legitimate lenders typically advertise in ways you would expect, such as online or through other mass media. If you get a loan offer by phone, through the mail or even a door-to-door solicitation, be on your guard immediately. According to the FTC, it’s illegal for companies to offer a loan in the U.S. over the phone.
5. The lender’s website isn’t secure
When visiting a lender’s site, what you don’t see can be just as important as what you do see. Always look for:
- A padlock symbol on any pages where you’re asked to provide personal information
- An “s” after “http” on the site address — “s” as in secure” — so it shows as “https://www…”
The padlock symbol and the secure address mean the site is protected from identity thieves who steal personal information and sell it to other criminals.
At best, the lack of these safety measures means the lender isn’t concerned about the integrity of the site. At worst, it could mean the lender is leaving your information exposed on purpose as part of a loan scam.
6. The lender has no physical address
Make sure the lender you’re interested in has provided a physical location. (Even then, you will still want to plug that address into Google Maps. In some cases, businesses running personal loan scams will list addresses that are actually vacant lots.)
If you don’t find any sign of an actual physical address, you should avoid the lender. Many operators of loan scams would rather be untraceable so they can avoid legal consequences.
7. The lender pressures you to act immediately
Don’t fall for the urgency plea. One of the hallmarks of loan personal scams is giving you an immediate deadline to take out the loan because the offer expires quickly — possibly even the next day.
A lender that uses this kind of high-pressure tactic could be up to no good. It may be a ploy to get you to make a rash decision.
Telltale signs of a legit lender
Aside from legitimate lenders being registered within the state they operate in, there are other ways to verify that they’re acting in good faith.
For example, the customer service experience should be smooth and fully transparent. A good business should have multiple ways to be contacted, whether it’s through phone, chat or email. Representatives should be able to clearly answer your questions without giving roundabout excuses as to why they cannot.
Legitimate lenders also will be interested in your credit history. According to the FTC, banks and other lenders will always evaluate creditworthiness before offering credit to anyone. There are lenders who work specifically with customers who have poor credit, but that doesn’t mean they’ll ignore it all together.
Diane Standaert, executive vice president at the Center for Responsible Lending, also points out that legitimate lenders won’t be willing to charge sky-high interest rates.
“Responsible lenders will charge no more than 36 percent annual interest for small loans,” Standaert says. “High APR exceeding 36 percent is a telltale sign that this is a loan that will most likely lead to a long-term cycle of debt that will damage their financial lives.”
Steps to take if you think you’ve been scammed
If you think you’ve fallen victim to a scam, the most important thing to do is not panic. While it can be scary to realize you may have permanently lost money, there are steps to take to try and resolve the issue.
The easiest way to have the authorities look into being scammed is through your state attorney general’s office. The federal government maintains a database of state consumer protection agencies to help you get in touch with the proper authorities.
Once in contact with the proper authorities, be sure to provide any documentation of correspondence with the bad lender. The process to recover your funds will be long — but having the capability to retrace your steps might help speed the process.
Shop legitimate lenders securely
If you need a personal loan, check out the available offers from trusted Bankrate lending partners. Get prequalified through Bankrate to see the best offer that you qualify for. This check will not impact your credit score and we will not share your information without your approval.
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— Bankrate’s Kelly Anne Smith contributed to the update of this story.