Personal loan scams: How to spot and avoid them

This might come as no surprise, but scams are on the rise. According to the 2023 report from the Federal Trade Commission, U.S. consumers lost over $10 billion to frauds and scams – a 14% increase from the previous year.

Per the FTC, when it comes to loan scams, they make up the third-most-reported type of identity theft loans. With the increase in the number of loan scammers, it’s important to know what to look for so you can avoid being scammed. The allure of a personal loan is apparent — you can use the funds to cover an emergency, pay for a wedding, or to spruce up your home. But how do you know if you're in danger of getting duped?

Let’s walk through some of the personal loan scams that are out there, red flags to watch for, and the actions you should take if you believe you’ve been scammed.

What are personal loan scams?

People can use personal loans for just about any purchase or expense, and some scammers are ready to pounce on those wishing to borrow cash. Loan scams can come in many forms. Some scammers operate under the guise of a fake company or agency to steal your personal information or gain access to your bank account through your credit card or Social Security number.

Here’s a list with some of the most common types of personal loan scams:

• Advance-fee loans: You might get a call, email, or come across a flyer. The supposed company claims it can issue you a loan, but you'll need to pay a processing fee upfront — usually by wire, money order or an overnight courier service.
  Here's the thing: If the loan requires an upfront payment, it's more than likely a scam. In most cases, you’ll never hear from the scammer again once you’ve made the payment.
• No-credit-check loans: This scam is usually targeted to those whose credit has seen better days or who might not understand how the loan process works. Most legitimate lenders take a close look at your credit history to gauge your creditworthiness. If a lender doesn’t seem to care one way or the other whether you have a poor credit score and doesn’t ask for other financial details, they could be running a scam.
• Debt consolidation scams: Some fraudsters will offer to consolidate your debt by lumping together your existing loans into a low-interest loan. But then they shortly play a disappearing act. Pay attention to how they go about it. Scammers may suggest you cut off contact with your creditors or pay an upfront fee.
• Debt relief or forgiveness scams: Fraudulent debt or credit relief servicers will offer to eliminate or lower your outstanding debts – but not until you’ve paid a large upfront fee. Debt relief scammers will send you a preapproved application. They often target people with student loan debt and offer loan forgiveness. That said, you should only trust federal government programs in connection with student loan forgiveness.
• Phishing scams: Phishing has to do with scammers who'll contact you via email or text message. The message usually includes a clickable link that is supposed to bring you to an application page.
  This bogus application page is a guise intended to gain access to their personal information or financial data. From there, the scammer takes the info you provided to take out a loan. You're responsible for the debt, and the scammer flees with the funds.

How to spot personal loan scams

Here are common telltale signs of scammers you'll want to look out for:

• Guaranteed loan approval: Reputable lenders will review your credit and look at your financials and other criteria before extending you a loan. If the lender says no credit is needed or bad credit is okay, run the other way.
• Upfront fees: Legitimate lenders will never ask you to pay a "processing" or 'Insurance" fee upfront. That said, some reputable lenders might ask you to pay an origination or application fee. But that's only after they're reviewed your credit history, credit score or given you the greenlight for the loan.
• Unusually favorable terms: Remember, the scammer is targeting folks who are hard pressed to find a loan and are struggling to get approved for one. If the lender is waving an usually large personal loan amount, low interest fees and no credit check, then it signals a scam.
• Lender is unregistered in your state: A lender needs to be registered to conduct business in your state. A lender that's the real deal will list on its website the states they're registered in.
• Unsolicited loan offers: Lenders that contact you first are a red flag. The FTC says it's illegal for lenders or telemarketers to offer a loan over the phone, and this rings especially true if they demand upfront payment.
• Applies pressure to act immediately: When the lender makes it feel like the clock is ticking and you'll need to act immediately, that is a telltale sign of a scam. Legit lenders know this is a big decision and give you the information and plenty of time to make the right choice for you.
• Suspicious website: Scammers may create websites that closely resemble a lender's website, but it might be riddled with typos and grammatical errors, and not secure or properly encrypted. Another sign is if the website doesn't have the "https."
• No contact information: If the lender is a reliable lending institution, it should have at least one physical address and contact information that's clearly visible and easily accessed on the lender's website. There's a chance the scammer may post a false address, so always double-check the location by using an online map or do a quick search.

How to avoid personal loan frauds

You can help yourself dodge scammers in your loan search by looking out for the red flags. You'll also want to pay attention to what makes a lender seem legitimate.

When shopping around for a lender, take the following steps:

• Search the company's website for contact information, including a legitimate address, email and phone number.
• Read online reviews to see if people have worked with the lender before and described their experience.
• Look for proper grammar and spelling usage on websites, messages or other advertisements.
• Don’t click on suspicious links that can allow scammers to access your personal and financial information.
• Search for a lender on Better Business Bureau (BBB) or Trustpilot to see how the BBB rates them and ensure they’re legitimate.

What should you do if you’ve been scammed?

Scammers are seemingly getting smarter all the time, and you wouldn’t be the first person to be tricked by one. In the unfortunate circumstance that a loan scammer has taken advantage of you, take one or all of these steps:

1. Cut off communication with the scammer. Once you realize you’re working with a scam artist, cease all contact right away. Stop any payment – if you can – to the scammer. Any further communication could unknowingly give the scammer even more personal or financial information.
2. Contact your bank or credit union. Call your financial institution as soon as possible to cancel transactions, freeze your accounts or issue fraud alerts. Your bank or credit union might even contact you if they suspect your identity was stolen.
3. See if you can get your money back. It might be too late, but check if you can get your money back from the financial institution where you sent the money from.
4. Document the scam however you can. Gather emails, texts, screenshots and any other evidence of the scammer’s actions. The larger the paper trail you can gather, the more likely you are to end up with a positive outcome after reporting the scam to authorities.
5. File a report with the police. Contact your local law enforcement and submit a report of the scam. Be sure to include any documentation you’ve gathered. An official police report could help stop or even catch the fraudster.
6. Reach out to the appropriate agencies. You can help prevent future scams by reporting your instance of fraud to the FTC and BBB as well as your state attorney general’s office and even the Federal Bureau of Investigation (FBI). You can anonymously report loan scams to the National Consumers League (NCL) to fraud.org.
7. Check your financial accounts. Regularly check your financial accounts to see if there's any suspicious activity such as unauthorized transactions.
8. Freeze your credit. You can place a credit freeze for free at each of the three consumer credit bureaus.
9. Monitor your credit regularly. Currently, you can order a weekly credit report at AnnualCreditReport.org.
10. Replace your lost cash. Depending on how much you’ve lost to a scammer, you may need to replenish your finances. A personal loan from a legitimate lender could help you afford your monthly bills while you’re waiting on a resolution for the scamming you experienced.

The bottom line: Be aware of personal loan scammers

Loan fraud is more common than ever, and consumers should be wary of all the telltale signals of loan scams. Stay on the lookout for lender red flags and be thorough when doing your homework.  Look for green flags that a lender is legitimate. If you find that you're working with a scammer, be prepared to act quickly.

Want to borrow from a source you can trust? Start a loan application today with Rocket Loans℠.