Loan Scams and What to Avoid – Keep Yourself Safe
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In times of crisis like today, you will easily come across several scam artists as well as predatory lenders who will be happy to help you. Whether you have been laid off, are in the middle of a health crisis, or suffer from a recession, predators will see it as a sign of vulnerability and an opportunity to act. Many consumers have lost money due to government impersonation scams where they were led to believe that they were dealing with a real government agency.
In 2021, the FTC received more than 2.8 million consumer fraud reports. New scams will happen daily, and scammers will continuously develop new tricks. However, it also means you can easily spot the scam when you know what to look for. This guide explains everything about loan scams and the best ways to avoid them.
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What are loan scams?
A loan scam is a loan that is offered under a pretense. A loan scammer will hook the target by making a false promise, and they will never deliver on it, or they will hide the cost of the loan. Many scammers use fake company names, logos, and false caller ID numbers to impersonate legitimate agencies. This way, they gain trust and offer you a loan. Through this, they aim to:
- Get your personally identifiable information like your social security number, bank account number, or credit card number.
- Seek permission to access your personal account
- Seek permission to get legal ownership of your property
- Charge fees for products and services you will never receive
- Charge a higher interest rate
Use Bankrate to Get a Personal Loan
- Get as much as $100,000 with rates starting at 5.95% APR*
- Use a personal loan to pay off debt, renovate your home, family needs, and more
- Takes minutes to see how much you can get
- Doesn't hurt your credit score to check
Signs of a scam
Loan scams come in different forms, but there are some signs you can easily identify. They are a few common red flags you must watch out for.
The immense pressure to act immediately
The first sign of a scammer is that they pressure you to act now. They will pressure the victims to make an immediate decision because their offer expires in a day. This is a false sense of urgency, and through this, they will ensure that you overlook the red flags. However, never make financial decisions or sign documents under pressure.
Sometimes they also communicate that something bad is about to happen, like a lawsuit filing, so you act fast. It is a ploy to get you to make a quick decision so that you do not have the time to research and identify the scam they are running. Take as much time as you want but think it through and do not fall for the urgency plea. You can take days and weeks to accept an offer.
Guaranteed Approval
Many lenders have requirements you will have to meet to be eligible for a loan. It could be a certain credit score, proof of employment, or proof of income. Even with loans for bad credit, you have certain criteria to meet. When a lender promises guaranteed approval, it is a scam. Genuine lenders will make it clear they need to look at the credit and your documents before approving the loan.
Many lenders want to know if you have a history of paying bills regularly. But personal loan scammers do not care about your creditworthiness. They often look for high-risk borrowers more likely to fall behind on loan payments and pay huge penalties. Work with a lender interested in your personal finance history and who runs the right checks before offering a loan.
Debt Cancellation
Scammers often promise to help get rid of your debt completely. Such scams increased during the pandemic, and scam companies defrauded borrowers for millions. Many debt settlement companies also take advantage of helpless customers by collecting payments and not using them to pay off their debt.
When a debt consolidation or settlement company is being pushy and asks you to cut all contact with the creditors, it is one of the warning signs, and they could be trying to scam you.
The lender is registered in a different state
As per the Federal Trade Commission (FTC), all lenders and loan brokers need to register in the state where they conduct business. So, before you apply for a loan, you can check the lender’s website to see if they legally conduct business in your state.
When a lender does not list registered states, it could be a big loan scam. Legitimate lenders will register their state, and they cannot loan you money if they do not operate in your state.
An upfront payment demand
Many scammers ask you to provide banking information, prepaid debit cards, or gift cards. They claim that they need this information for loan fees or insurance, but it is a sign of a scam. Genuine financial institutions might charge an application fee or a fee for your credit report but will never ask you to pay upfront. The charges will be deducted from the loan.
It is a big scam whenever you are asked to share details of the prepaid card. It is not traceable, and you cannot report it as stolen when it is with the lender. That said, you could lose funds from your account. No reputable lender will ever request an upfront fee to receive the loan proceeds.
The lender has no address
If you are interested in a lender, but they do not provide any physical address, consider it a red flag. Many scammers list addresses that are usually vacant lots which are why you must verify the address. If you do not see signs of a physical address, stay away from the lender.
The lender writes or calls you
You might have received a loan offer by phone or even through email. If this has happened, you should be on your guard. The FTC has made it illegal for lenders to offer a loan over the phone or even ask you to pay before they deliver. But they can send out basic advertisements through email. However, it should not be a loan offer.
Some will use a legitimate lender’s name or swap out the name and number on the caller ID to make you believe they offer a real deal. Ignore any calls or emails and contact the lender directly through the lender’s website. Never work with a lender who targets you over the phone or via direct mail.
Use Bankrate to Get a Personal Loan
- Get as much as $100,000 with rates starting at 5.95% APR*
- Use a personal loan to pay off debt, renovate your home, family needs, and more
- Takes minutes to see how much you can get
- Doesn't hurt your credit score to check
The lender is not straightforward about the fees
Some scammers will neither post their fees on the website nor disclose them when asked. Even if you have been approved for a loan, they will not disclose the fees and demand an upfront payment. Fees should always be discussed before you sign anywhere in the loan application process.
Hidden or advance fees are always a red flag, and you should walk away from lenders that follow this practice. No lender should ask for upfront money for anything. There could be an application fee or appraisal fee, but they will inform you of the same before you complete the application.
Phishing scams
Due to the rise in the number of smartphone and internet users worldwide, data phishing scams have been on the rise. It is carried out by fraudsters who disguise themselves as financial service providers from well-reputed companies and introduce attractive new offers.
False representation leads to this type of scam, and if you end up sharing your personal or financial details, they will get access to your accounts and start pilfering your money through transfers. They also have websites resembling a financial institution's website, but you should never divulge your personal information and verify their identity before you act.
It is too good to be true
Lastly, keep your eyes and ears open at all times, and if you see an offer that is too good to be true, it probably is. A legitimate company will not just call you with a loan offer; you will not immediately qualify for the loan at a low rate. Never accept a letter in the mail from a bank giving instant approval or receiving funds at massive speed without paying any application fees. No matter how good the loan offer looks, if you think it sounds like a scam, it is by all chance.
Who is at risk of a loan scam?
A scammer can target anyone who is unsuspecting or might have trouble getting a loan through traditional means. It includes people with bad credit, debt, and the elderly. People with bad credit might find payday loans interesting since they have no credit check requirement, and the same loan from a legitimate lender will come at a high-interest rate. Scammers often buy lists of individuals who have applied for such loan products online, making them their next target. If you fall into one of the categories mentioned here, stay vigilant about any company that tries to sell you a loan product that is too good to be true.
Steps to take if you have been scammed
If you have been scammed, you must act very quickly. There is no time to sit back and regret the situation. Instead, follow the steps below to reduce the damage and recover what you lost.
Get the documentation ready
You might have screenshots, emails, or other documentation to help your case. Get your hands on them and present them to the authorities whenever you contact them.
Speak to the companies involved
The first step to take is to speak to the companies that are involved. If you have paid from the bank account or your credit card, you need to contact the bank or the creditor immediately and ask them to cancel the transaction. You must also request them to begin the security processes if any.
File a police report
Next, contact the local police department for details on filing a report. Keep a copy of the report as proof for the later stage.
Check your credit
Whenever your financial or personal information is stolen, the scammer could try to use the details to open new accounts in your name or use your credit. Get your credit report and check it for any unauthorized activity. Speak to the credit bureaus and place the fraud alert on your report. This alert will inform the creditors that you have been a victim of fraud, and they will contact you to verify your identity before issuing new credit.
File your report with FTC
When you file a fraud report with the FTC, it will help investigate and track scams. Once you submit the report, you can get tips on how to respond to scammers. You must also contact and inform the Better Business Bureau to help protect others and file a complaint with the Consumer Financial Protection Bureau.
Use Bankrate to Get a Personal Loan
- Get as much as $100,000 with rates starting at 5.95% APR*
- Use a personal loan to pay off debt, renovate your home, family needs, and more
- Takes minutes to see how much you can get
- Doesn't hurt your credit score to check
FAQs
What types of loans should I avoid?
Not all loan products are meant for you, but they are available widely to consumers. You should avoid some types of loans unless it is your last resort. These include payday loans, cash advance loans, 401(K) loans, and title loans.
How can I identify a legitimate loan company?
You can identify and approach a genuine financial institution even with poor credit. Firstly, check for their contact information, read the online reviews, and ensure it is registered with the state agencies.
Which are the most common loan scams?
Some of the common loan scams include phishing, debt relief, charity scams, fake check, and dvance-fee loan scams.
The bottom line
No matter how desperate the times are, there are ways you can protect yourself from identity theft. Do not be lured by loan terms with a long repayment period and low-interest rates. Such loan offers only become personal loan scams, and you lose more money than you ever thought. Even if you have bad credit, many genuine lenders will be willing to work with you. Look for the red flags and be wary of how the lender approaches and talks with you.
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Writer
Vandita Jadeja is a financial writer and editorial assistant at Joywallet. She loves to read and write about money and brings 7 years of experience from the financial industry. She loves coffee, mountains and sunsets.
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