Consumers lost nearly $3.3 billion collectively to fraudulent practices in 2020, according to the Federal Trade Commission. Debt consolidation, medical bill payment and other services can offer attractive personal loan options and lure unsuspecting consumers who then learn that the lender was nothing more than a fraud.
How can you determine whether a loan company is legitimate? Here are common signs of a potential loan scam.
What are personal loan scams?
Loan scams are fraudulent businesses that prey on consumers who are looking for quick solutions to their financial problems, says Daniel Hill, a CFP and president of Hill Wealth Strategies. They’re typically found online, with no storefront or physical address.
“They’re often illegitimate business fronts that profess to lend money but in actuality, take money from people,” explains Hill. “These sites can be popular and they seek out the consumer with promises of ‘free’ money.”
9 ways to spot personal loan scams
While this isn’t a comprehensive list, some of the most common ways to spot a personal loan scam include:
- The lender isn’t interested in your payment history.
- The lender isn’t registered in your state.
- The lender demands a prepaid credit card.
- The lender calls, writes or knocks.
- The lender’s website isn’t secure.
- The lender has no physical address.
- The lender pressures you to act immediately.
- The lender guarantees approval.
- The lender is not transparent about its fees.
1. The lender isn’t interested in your payment history
Truly 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). This is important — most lenders need to know whether you have a history of paying bills on time and in full in order to make sure that you’ll be just as diligent about repaying a loan.
Conversely, fraudulent businesses aren’t interested in timely repayment. In fact, they tend to seek high-risk borrowers who are likely to fall behind on loan payments and, as a result, incur their excessively high late fees and penalties.
Of course, there are some reputable lenders that offer bad-credit loans, taking into account more than just your credit score when determining your eligibility. However, these lenders will still typically ask for things like your income, employment information and education before offering you a loan.
Takeaway: Do your research and read the fine print. Make sure you’re working with a lender that’s interested in your previous financial history.
2. The lender isn’t registered in your state
The Federal Trade Commission (FTC) requires that lenders and loan brokers register in the states where they conduct business. If a lender you’re interested in does not list any registered states, you could be dealing with a loan scam.
Check the lender’s website to verify the list of states where it legally conducts business. If you cannot find such a list, contact your state attorney general’s office for further verification. You can also contact your state’s Department of Banking or Department of Financial Regulation to confirm whether the company legally operates where you live.
Takeaway: Checking registration is a key step to ensure that you’re dealing with a reputable company, separating the frauds from the legitimate businesses.
3. The lender demands a prepaid credit card
Some scammers have been known to require prepaid debit cards from borrowers, claiming that they need it for insurance, collateral or fees. This is a scam. 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 is a sure sign of a personal loan scam. It’s virtually as untraceable as cash, and you won’t be able to report it as stolen if you’ve given it voluntarily to a lender.
Takeaway: Legitimate lenders will not ask for money upfront; application or origination fees are typically deducted from your total loan amount.
4. The lender calls, writes or knocks
Reputable 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 through 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 and ask you to pay before they deliver.
Takeaway: A reputable lender will not target you over the phone, through direct mail or through door-to-door solicitation.
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.
- A URL that begins with “https” instead of “http” (the additional “s” stands for “secure”).
The padlock symbol and the secure address mean that 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 that the lender isn’t concerned about the integrity of the site. At worst, it could mean that the lender is leaving your information exposed on purpose as part of a loan scam.
Takeaway: Carefully review the loan websites you visit, looking for indicators that they’re secure. These security measures not only make it more difficult for hackers to steal your information, but also indicate that you’re dealing with a reputable business.
6. The lender has no physical address
Every lender you’re interested in should provide 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 a physical address, avoid the lender. Many fraudulent businesses would rather be untraceable so they can avoid legal consequences.
Takeaway: It’s always a good idea to do business with a company that can provide an address. Companies that only advertise P.O. Box addresses should be thoroughly investigated before you proceed.
7. The lender pressures you to act immediately
Don’t fall for the urgency plea. One of the hallmarks of personal loan scams is giving you an immediate deadline to sign on for a loan because the offer expires quickly — possibly even the next day.
Lenders that use such high-pressure tactics could be up to no good. It may be a ploy to get you to make a rash decision.
Takeaway: You should never be pressured into proceeding with a loan. Legitimate lenders may impose deadlines for accepting a loan offer, but you will likely have weeks, not days, to decide whether or not to accept the loan.
8. The lender guarantees approval
There are no guarantees when it comes to personal loan application approval — any company that suggests otherwise should cause you to think twice.
“Tell-tale indicators of loan scams include wording that ‘guarantees’ loan approval,” Hill says. “These scams promise people that they’ll be guaranteed approval despite their income, credit history, debt or credit score. These promises are often absurd and sound too good to be true. If it includes ‘guaranteed’ in any of the language, it’s a good sign it’s a scam.”
Takeaway: Lenders use credit score, income and employment information to determine personal loan approvals on a case-by-case basis. As such, a lender can never guarantee up front that you will be approved.
9. The lender is not transparent about its fees
Scam lenders will avoid posting their fees prominently on their websites or disclosing them when asked. They may also tell you that you’ve been approved for a loan and then demand a fee from you.
Hidden fees that are imposed after loan approval are a red flag. The FTC website suggests that you walk away from any company that follows this practice, particularly if you’re told that the up-front money is for such things as “processing,” “insurance” or “paperwork.”
Takeaway: Legitimate lenders may charge application, credit report or appraisal fees. However, those fees will be clearly disclosed on the lender’s website.
Common types of loan scams
Most types of loan scams seek to either extract money up front or provide loan terms so unforgiving that borrowers will be subject to late fees or other charges. Here are some of the most common forms of scams.
Loan fee scam
Scammers may try to offer you a low-cost loan in exchange for hundreds or thousands of dollars of fees up front. Once they receive these fees, they will cut off contact without providing any funds. These fees could also be demanded through cash, gift cards or wire transfers.
While there are some legitimate personal loan lenders that consider more than just your credit score when approving you for a loan, some scammers will promise funds without checking your credit score at all. This is a red flag, since your credit score is usually one way lenders assess the risk of lending to you.
Private student loan forgiveness scam
Some forms of student loan forgiveness are available through the federal government for federal student loans. There are few ways to have private student loan debt forgiven, however. If a company approaches you promising to forgive your student loans, it’s likely a scam.
Debt consolidation scam
Debt consolidation can help you streamline the process of repaying your debt and can save you money in the long run. But if a debt consolidation company is being pushy or tells you to cease contact with your creditors, chances are it’s trying to scam you.
Who is most at risk for a loan scam?
Scammers tend to target people who either are unsuspecting or may have trouble getting a loan through conventional means. Borrowers with a lot of debt, the elderly and people with bad credit may be most at risk for these types of scams, since scammers may claim to offer products that those borrowers desperately need. No-credit-check loans, for instance, may be particularly attractive to people with poor credit, since bad-credit loans from reputable lenders may come with high interest rates.
If you fall into a high-risk category, it’s important to stay vigilant about any company that advertises a loan product that seems too good to be true for your situation. If in doubt, check that the company is licensed in your state or contact your state’s attorney general.
What to do if you think you’ve been scammed
While no one wants to think that they’ve been a victim of fraud, it can and does happen. The good news is that there are several steps you can take if you’ve been targeted, beginning with cutting off all communication with the company in question.
“If you think you’ve been scammed, don’t make any further communications with the scammer, even if you are sent hostile or threatening emails,” Hill says.
Here are some additional steps to consider taking:
- Provide documentation of what happened. If you have emails, screenshots or other documentation that will help your case, gather them to present to authorities.
- Contact your local law enforcement. By filling out a police report, you’ll have an official record.
- Contact agencies specializing in oversight. After calling law enforcement, consider contacting your state attorney general’s office, the FBI, the FTC and the Better Business Bureau. With this information, these agencies can better serve and protect America’s consumers.
- Talk about it with family and friends. As scammers evolve their tactics, it’s important to help others stay informed. “Don’t be ashamed of what happened,” Hill says. “Share your stories with others. Scammers often rely on the shame and guilt of those they scam and it becomes easier for them to perpetuate their lie. So, if you’ve been scammed, you are now in the position of power to stop them by sharing their tactics.”
- Place a fraud alert with one of the major credit bureaus. If you place an alert with Equifax, Experian or TransUnion, the alert will be posted with all three. A fraud alert isn’t a credit freeze; instead, it lets creditors know you may be a victim of fraud and that they should contact you to verify your identity before issuing new credit.
How to spot a legitimate loan company
Even if you have below-average credit, there are plenty of companies that offer legitimate loans. When searching for a good lender, start with these steps:
- Check for contact information. A lender’s phone number, email address and physical address should be readily available on the website, even if it’s an online-only lender.
- Investigate online reviews. Customers posting on Google and Yelp will have the best insight into the experience of working with a lender.
- Look at the Better Business Bureau. The BBB is a good way to find out if a lender is trustworthy, and it’s also a source for customer reviews.
- Make sure it’s registered. Legitimate lenders must register with state agencies before giving out loans. If you’re unsure if a lender is safe, contact your state’s attorney general.
The bottom line
If you need a personal loan, do your research and compare multiple lenders to make sure you’re getting a good rate from a trusted source. This Bankrate list of the best personal loans is a good place to start — these companies are reputable and offer competitive rates.
- The best personal loans
- Where to get a personal loan
- Short-term loans can have long-term consequences
— Bankrate’s Kelly Anne Smith contributed to the update of this story.