4 Ways to Spot Personal Loan Scams and How to Protect Yourself
According to the Federal Trade Commission’s (FTC) Consumer Sentinel Network Data Book 2022, advance payments for credit services was number nine on the top 10 fraud categories. Consumers reported losing over $8.1 million for the year, with median losses of $1,000 per incident.
The category encompasses multiple types of scams, including credit repair, insurance, unclaimed funds, and personal loan scams. We’re focusing on the last one, in which scammers trick victims into giving them money or personal information.
Two common types of personal loan scams
Scammers may prey on people who have bad credit or a low income and struggle to qualify for a personal loan from a legitimate lender. The scammer may even go as far as buying lists of people who took out payday loans and reaching out to them directly, or creating advertisements that target people searching for bad credit loans or payday loans.
While the messaging and specifics frequently change, personal loan scams often fall into one of two categories:
- Advance-fee scams: The fraudsters collect upfront fees from victims and then don’t follow through by giving them a loan. These fees can have different names, such as a loan application fee or a processing fee. Or, you might be required to buy “insurance” to get the loan. Sometimes, you’re told that you were already approved and need to pay the fee to finalize the loan.
- Phishing scams: Alternatively, the fraudsters might try to steal your personal information, such as your name, address, phone number, email address, and Social Security number. They may be able to use this to steal your identity and open credit accounts, or commit other crimes, in your name.
If you have bad credit it can be difficult to get a personal loan—that’s one reason we want to help people improve their credit. But you need to be wary of personal loan scams, especially when you’re in a tough situation and need to act quickly.
4 signs of a personal loan scam
Personal loan scammers are continually coming up with new schemes and tactics, but here are four ways that you may be able to spot personal loan scams.
1. You have to pay an upfront fee
Be especially cautious if the person or company wants you to pay anything before you get the loan. Many legitimate personal loans have origination fees, but the fee is taken out of the loan amount—you don’t pay it directly. Occasionally you may also see application or appraisal fees with legitimate loans, but these aren’t common with unsecured personal loans.
When you’re asked to pay any type of upfront fee, either walk away or take some time to research the lender. If something feels off, or you really want to believe it’s true in spite of warning signs, then walking away is probably the better option.
2. The company guarantees you will get approved
Scammers attract victims by promising approval regardless of credit or income. Although there are legitimate loans that don't require a credit check, even then, the lenders may consider your overall creditworthiness and can’t guarantee loan approval.
3. You feel pressured to act quickly
People often don’t think clearly when they’re in a tight financial spot and are pressured to make fast decisions, and scammers use this to their advantage. You might be told you have to make a decision right now or you won’t get approved in the future. If you're feeling pressured, that’s definitely a red flag.
4. You’re asked for excess personal information
Reputable lenders may need your name, contact information, and Social Security number to run a credit check and verify your identity. But never share excess personal information, such as:
- Your mother’s maiden name
- The username or password for any of your accounts
- A code sent to your email or phone from one of your other accounts, especially a bank or investment account
You should also be careful about sharing your basic personal information and check if the lender is legitimate before submitting an application.
How to check if a personal loan lender is legitimate
Going slow and doing your research might not seem like a priority when you need extra money right away. But unless you’re dealing with a well-known financial institution, confirming the lender’s legitimacy can be important for protecting yourself.
Verify the company's state registration
Lenders are required to register in every state where they offer loans. You should be able to find the license number on the lender’s website, although it can sometimes require digging into the fine print. You can then verify it with the agency that regulates lenders in your state or your state’s attorney general’s office.
If you can’t find or verify the license, don’t risk applying for a loan with the company. You could also report them to your state’s regulator, attorney general, and FTC to help protect others.
Scrutinize the lender’s reviews
You can also look for reviews on sites like Trustpilot and the Better Business Bureau to learn about other borrowers’ experiences. If you don’t find any online reviews or uncover reports from other people who got scammed, you’ll know to walk away. Plus, even if it’s not an outright scam, reading reviews can help you avoid companies that have terrible customer service.
Consider how you learned about the lender
Legitimate companies may advertise, follow up with prospects, and send preapproved loan offers to consumers who meet their credit requirements. However, you can use the information to look up the lender. And the offers won’t guarantee that you’re approved or ask for an upfront fee.
Be cautious if a lender calls you out of the blue, sends an unexpected text or email, knocks on your door, or slides into your DMs to offer you a loan. Or if you first learn about the lender on social media.
You also need to be aware of phishing attacks—when scammers send legitimate-looking emails or text messages that ask you to share personal information or tell you to click on a link.
Sometimes, the link will install malware on your device that can steal your information. Or, the link may lead to a website that looks real—criminals will copy and paste logos and other graphics—but is actually set up to collect your information.
Improving your credit can help you qualify for a loan
One reason people fall for personal loan scams is that they need money quickly and don’t have many places to turn. If you’re struggling with bad credit, Ava’s Credit Builder card can help. And the Save and Build Credit program can also help improve your credit score while you set aside savings.
In the meantime, you can look for legitimate loans that don’t require good credit. For example, some credit unions offer payday alternative loans (PALs) in an emergency, allowing new and existing members to borrow up to $2,000. Some large banks are also beginning to offer small-dollar loans based on existing customers’ bank account history rather than their credit.