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Steering Clear of Scams: How To Avoid Fake Loan Companies

steering clear of fake loan companies

Personal loan scams are becoming more and more prevalent as banking transactions continue to move toward a more online environment. A personal loan scam can not only cost you money, but it can also lead to identity theft, which makes spotting them and avoiding them even more important.

Below we'll look at how to spot these scams, the different types of scams out there, and how to find a legitimate loan company to help you with your financial needs.

Key Highlights

  • Always be wary of lenders offering "guaranteed approval" without credit checks, demanding upfront fees, or operating without state registration, as these are common tactics of fake loan companies.
  • Protect your sensitive personal and financial information. Read the complete terms before clicking submit, and, when possible, only share your sensitive personal information with direct online lenders instead of third-party websites.
  • Ensure online personal loan lenders have secure websites, verifiable physical addresses, and a healthy balance of customer reviews to avoid falling prey to internet-based loan scams.
  • Advance fees, debt consolidation, and payday loan scams seek high-risk borrowers and exploit them; a reputable lender will base its loans on creditworthiness, reported by the three major credit bureaus, and capacity to pay, not on upfront payment or empty guarantees.
  • If you suspect you have been the victim of a fraudulent loan, you need to act immediately, file a police report, provide a fraud alert on your personal information, and help to ensure that the bad actor will face legal consequences for their fraud.

Key Scam Statistics

key scam stats graph

The prevalence of online loans and financial scams has grown along with technology and consumers' growing credit needs. Below are just a few of the statistics that show how spotting personal loan scams is even more important than ever.

  • third (33%) of all US consumers plan to apply for new or refinance existing credit within the next year.
  • In a Q4 2023 survey, TransUnion reported half (48%) of respondents stated they were targeted with online, email, phone call, or text message fraud over the last three months.
  • Reported scam fraud rose 30% in 2022 to $8.8 billion, an increase of more than 30 percent over 2021, with the largest categories being investment and imposter scams
  • 48.6% of all reports to the FTC were to report fraud, followed by identity theft at 25%
  • Fraud impacts young and old: Interestingly, younger people reported losing money to fraud more often than older people (41% of those aged 20-29 reported losing money to fraud, vs. 18% of those 70-79)
  • However, when people 70+ did have a fraud issue, the median loss was much higher than for younger generations ($1,500 median loss for those 80+, vs. $500 for those aged 20-29)
  • The Federal Trade Commission (FTC) is monitoring "consent farms" and the use of "dark patterns" where consumers are nurtured to expect they will receive a quote or an offer, but, instead, the data broker simply sells their personal information. A California company recently settled with the FTC for selling millions of deceptively collected mortgage loan leads.
  • Unsolicited text messaging and robocalling have become so pervasive that the FCC has revised a rule to require all businesses to collect consent for each party it intends to share consumer information with.

How To Know If A Loan Company Is Legit: Red Flags to Watch Out For

how do you know if a loan company is legit magnifying glass

The lending industry can be a risky place, especially with fraudulent players trying to draw borrowers away from legitimate financial institutions. To avoid falling into their trap, it is important to be able to spot personal loan scams by understanding some of their tactics.

Below are just some of the red flags to watch for.

  • Guaranteed or overstated odds of approval: A lender that guarantees approval or a high rate of approval, such as 90%, without a credit check or check on your previous financial history is one of the biggest red flags. Credit checks are crucial to the lending process as they let the lender know your likelihood and ability to repay.
  • Upfront fees: Truly reputable lenders only ask for fees once the loan is approved. If a lender asks you to pay money upfront before any services are rendered, there is a high likelihood that the loan is a scam.
  • No state registration: To be able to offer loans, a lender needs to be registered in the state that they are operating out of. This is a lawful requirement that they should be able to provide proof of. If you are unable to find this registration, you should walk away from the offer.
  • Questionable reviews and contact information: In some cases, marketing companies will pose as lenders to gain and sell your personal data. While some of the companies are reputable, others simply trade sensitive information that may result in a personal information leak. If the company is reputable, it should have verifiable reviews and a physical address.
  • Dark patterns: Have you ever got the feeling that you were being tricked into taking immediate action? This is likely because scam companies use what are referred to as dark patterns, which include things such as confusing language, difficulty opting out, and bait-and-switch techniques designed to urge you to act. If anything seems confusing or pushy, it may be wise to seek another lender.

Spotting Illegitimate Lenders Online

internet secure lock

In this digital era, the internet has become a breeding ground for loan scams. Fortunately, there are various methods to identify fraudulent lenders online. Some of the best ways to help distinguish a legitimate lender from a fraudulent one include:

  • Checking their website security: Any website that is requesting personal information should be a secured site. If a site is secured, it should have a valid security certificate and an "https" at the beginning of its URL. It is important to note that scammers can get secured sites as well, so this should be just one of the things to look for when determining if a company is fraudulent.
  • Reading through terms and conditions: It is easy to quickly scroll through and accept terms and conditions. While for many legitimate companies, the verbiage is standard, scammers use this as a way to get you to agree to terms that you wouldn't otherwise. Be sure to thoroughly read how they share your data, so you can make sure they aren't giving your private information to other sites.
  • Looking at customer reviews: Customer reviews can provide you with valuable insight into how a company operates and also may help you to spot a potential scammer. Before working with a company, make sure that they have a good amount of positive reviews over a period of time and fewer negative ones. You also want to make sure that reviews aren't too generic, as those may have been artificially generated to make the company appear trustworthy.

Common Types of Personal Loan Scams

caution sign back of money

With more and more business being performed online, fake loan companies come up with loan scams quite frequently. While the form of the scam may change as technology becomes more advanced, there are three primary types of personal loan scams most often perpetrated. They include:

  • Advance fee scams: Advance fee scams involve requesting an upfront charge before releasing a loan. This payment is usually presented as a “processing” or “insurance” cost. These fraudulent individuals take advantage of the victim’s urgent need for money, promising that this initial fee is minimal in exchange for guaranteed funds. It should be noted that legitimate lenders do not require any fees to be paid prior to approving a loan.
  • Debt consolidation scams: Many scammers use the promise of debt consolidation to take advantage of individuals in financial distress. These fraudsters offer a quick and easy solution to eliminate all debts, but it comes with extremely high interest rates and a large upfront fee. Unfortunately, these promised results never materialize. It is important to remember that legitimate lenders will base their decision on providing debt consolidation loans on your credit history and income rather than asking for an upfront payment.
  • Payday loan scams: Scammers target individuals in need of quick cash with promises of personal loans, but these often turn out to be costly traps. These loan offers typically come with high fees and unattainable repayment terms that can trap the borrower in a never-ending cycle of debt. In some of the worst cases, the lender may not even exist.

Remember that most legitimate lenders base their approval for loans and debt consolidation on an individual’s income and credit history rather than making empty guarantees about instant money.

Don’t fall prey to false assurances from scammers claiming they can provide you immediate funds through a personal loan offer – always stay vigilant against such scams by doing research before proceeding further.

Protecting Your Personal Information When Obtaining Personal Loans

In the battle against fraudulent loan schemes, it is not only crucial to spot fake lenders but also imperative to safeguard your personal data. This includes sensitive information such as addresses, date of birth, social security numbers, bank account details, and credit card information.

Always be cautious if a lender calls or emails you about a loan opportunity. Unsolicited loan offers are commonly used by scammers to target unsuspecting victims. You should always scrutinize unsolicited offers accordingly.

You also want to make sure to do your research on a company before giving out any personal information. Look at reviews, website security, and overall online presence to see if the company appears to have a good reputation.

Keep in mind that the majority of trustworthy lenders are clear about their terms and have a robust online presence.

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Keep in mind that the majority of trustworthy lenders are clear about their terms and have a robust online presence.

Reporting a Personal Loan Scam

reporting a personal loan scam

Coming across a fraudulent loan provider can be unsettling, but sharing your experience can help in the battle against loan scams. Reporting these companies to relevant authorities such as the CFPB, Federal Trade Commission, Better Business Bureau, or local law enforcement agencies can help safeguard other potential targets.

By reporting incidents of possible fraud involving loans and financial services to reputable organizations like FTC, BBB, or even your community’s police department, you have the power to make a significant impact in preventing others from falling victim to similar schemes. Some agencies that you can report issues to include:

  • Consumer Financial Protection Bureau: The Consumer Financial Protection Bureau is a U.S. government agency and was established to ensure banks, lenders, and other financial institutions treat you fairly. Ensuring that a loan company's practices are fair, transparent, and competitive is precisely within their charge. You can report a claim with the CFPB here.
  • Federal Trade Commission: Loan scams are a major concern, but fortunately, the Federal Trade Commission is actively working to combat them. You can do your part by filing a complaint with the FTC and supporting their efforts to stop unfair, misleading, and deceitful business practices.
  • Better Business Bureau: The Better Business Bureau has an important role in the fight against loan scams. When you report a scam to them, it not only helps to warn others about potential frauds but can also lead to investigations and consumer alerts being issued.
  • Local Police Departments: The local police department is a valuable ally in the battle against loan scams. By informing your local authorities of any fraudulent activity, you can aid in their efforts to uncover and prosecute these scammers.

It’s important to note that your report could play a crucial role in identifying and apprehending these con artists.

Finding Reputable Lenders

finding reputable lenders

While spotting potential fraudulent lenders is critical when looking to borrow money, so is knowing how to find legitimate lenders. While the below options are safe for borrowing, it is important to consider each option carefully to determine if they are the best option for your loan needs.

Online Banks

When searching for a personal loan, many borrowers turn to banks as their first option. With competitive terms and interest rates, banks are a trustworthy source of personal loans. Whether it is a local bank in your community or a well-known national institution, there are various types of personal loan options available.

Keep in mind that the application process for obtaining a bank’s personal loan can be extensive and thorough. It is essential to have all necessary documents prepared beforehand to ensure the process goes smoothly.

Credit Unions

A credit union is a viable option for those seeking an alternative to traditional banks. These nonprofit organizations are owned by their members and often offer loans with more favorable terms, including lower interest rates.

It’s important to note that in order to apply for a loan from a credit union, you must first become a member and may be required to repay your loan directly from a credit union account.

It should be noted that each individual credit union has specific criteria for membership eligibility. Before submitting your application, make sure to confirm if you meet the requirements set forth by the institution.

Credit Card Companies

Credit card companies like American Express and Chase offer personal loans from their websites, apps, and via direct mail. If you qualify, the offers will be available once you log in, and it's often one of the fastest ways to see what loan amount you're pre-approved for and receive the funds.

Online Lending Platforms

The lending industry has been transformed by the emergence of online platforms, which offer borrowers a convenient way to access loans from multiple lenders without leaving their homes. These platforms have simplified the comparison of loan options and terms to streamline the discovery of lenders.

It is important for individuals seeking loans through these online platforms to ensure they are dealing with reputable companies. Always verify the credibility of an online lending platform and take into consideration feedback from previous users before applying for any loan. Platforms like Bankrate, NerdWallet, and Prosper are among the largest and most reputable.

The Bottom Line

The world of lending can be complex, especially in an online environment. Staying alert and informed is your best defense against loan scams. By recognizing the red flags of fake loan companies, understanding common loan scams, and protecting your personal information, you can avoid falling victim to these scams.

Remember, the key do's and don'ts:

  • Watch for red flags, such as unsecured sites, a lack of physical address, and being pressured to make a quick decision. If you notice any red flags, walk away.
  • Take the time to research different lenders and options, paying close attention to total cost and customer reviews.
  • Before clicking submit, take a few extra minutes to research the website you're giving your information to.
  • Understand how your data will be used if it's being shared with companies other than the site you're applying to.
  • If you encounter a fake loan company, immediately report it to the proper authorities.
  • While navigating the lending landscape can be challenging, especially for those with bad credit, finding reputable lenders and adopting strategies to improve your credit can help you safely secure a loan.

Frequently Asked Questions

How do I know if a loan company is real?

One way to confirm the legitimacy of a loan company is by checking if it has been registered in your state and obtaining information about its licenses from relevant state regulatory agencies. Another helpful step would be conducting a search through the Better Business Bureau website, which can provide details on whether or not the company is accredited.

You may also reach out to your state’s attorney general office for additional validation. This will help ensure that you are dealing with an authentic and trustworthy loan provider.

Are loan sharks illegal?

Loan sharks offer loans with exorbitant interest rates and resort to aggressive tactics such as threats and harassment in order to recover their money.

While it is not against the law to borrow from a loan shark, doing so comes with significant risks. These individuals often operate outside of legal boundaries and may use unlawful methods for debt collection that can put borrowers in physical danger.

What are some common red flags of fake loan companies?

If a loan company guarantees approval without credit checks, asks for upfront fees, and lacks state registration, these are red flags indicating it might be a fake loan company.

How can I protect my personal information when dealing with lenders?

One way to safeguard your personal information when interacting with lenders is by rejecting questionable loan offers and confirming the authenticity of potential lenders before disclosing sensitive details. The lender's website should be secure and contain a physical address in their contact information. Reviews should be fairly easy to find.

It is also a good idea to use credit monitoring software so you will receive a notification if your credit or personal information relating to your credit may have been compromised.

What options do I have if I have bad credit?

If you have bad credit, you may still be able to secure the money you need with the right lender or a co-signer. Even if you are able to have someone co-sign your loan, you should still work to improve your score by maintaining a positive payment history, keeping credit balances low when compared to the limit, and refraining from opening new credit.


By
Melissa Nason Ferreura

Melissa has worked in finance for over a decade, focusing on publications designed to help readers make their money work to their advantage to achieve both short-term and long-term financial goals.

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Editor
Zach Robbins

Zach has been recognized on Inc. 500 & “Top Places to Work” lists & has been featured in ConsumerAffairs, Forbes, GoBankingRates, Huffington Post, and U.S. News & World Report.

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