How to Spot and Avoid Personal Loan Scams

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A personal loan can be a much-needed life saver if you’re looking for a large sum of money quickly, whether it’s for an unforeseen medical expense or to make a major purchase. But it also can quickly turn into a nightmare if it’s fraudulent.

There’s more reason than ever to be wary. The Federal Trade Commission in February reported that it received nearly 3 million complaints from consumers in 2018, and those people said they lost nearly $1.48 billion to fraud — a 38% increase from the year before.

When seeking a personal loan, it’s critical to stay on guard for any suspicious offers.

What are loan scams?

Loan scams are enterprises that appear to offer loans but have additional suspicious intent. Fraudsters are ultimately after your banking information or money, and have no interest in giving you money.

Many of these scams now thrive on the internet. Online fraudsters steal millions of dollars each year, and some are pretty savvy in their methods.

7 signs of a personal loan scam

Scams are very common, especially online, which is why you have to be careful when deciding where to get a loan. If you're planning to get a personal loan, here are seven things to watch out for to avoid being scammed.

1. Your approval is guaranteed

You may have seen promotion for personal loans with “guaranteed” approval. Simply put, credible lenders never guarantee a loan before you apply.

Banks and other legitimate lenders generally look into your financial information and past before making a loan decision. After all, they want to make sure they’re getting into business with someone acting in good faith, too.

2. No credit check is required

A lender offering to skip a credit check should immediately raise eyebrows. Your credit history is essential information for the lender. It can reveal how likely you are to repay the loan in full and on time. And the stronger your credit, the more likely you are to have more options and see competitive rates when securing a loan.

That said, if someone’s running a scam, they have no interest in your credit history; they’ll approve anyone for a loan to try to get their money or sensitive information, like a Social Security number.

3. Fees are paid upfront

Scammers want to get away with your money in a hurry. Upfront fees before a loan is approved often indicate fraud. A false lender may say these are for insurance, processing, or paperwork.

Legitimate banks and lenders do frequently charge fees for an application, appraisal, or credit report. But they mark those fees clearly, and they’re usually paid after loan approval and taken from the borrowed amount.

4. The lender is unregistered

If a lender isn’t registered, or particularly isn’t registered in your state, then you should walk away.

The FTC requires lenders and loan brokers to register in the states where they do business. You can confirm registration by calling your state's attorney general office or your state’s Department of Banking or Financial Regulation.

5. The lender has no physical address

Banks have branches. Other lenders have offices. Scammers, however, don’t want to be traced so they’re not held accountable.

Be sure your prospective lender has a physical address. A company that only lists a PO Box, or no address at all, is one to avoid.

6. The website isn’t secure

Whenever you’re providing sensitive information online, you should make sure the website you’re using is secure. What does that mean? Secure websites use Secure Sockets Layer (SSL) to encrypt the transmission of data. If a lender isn’t doing that, then they’re not concerned enough about protecting your information.

Here’s what to do: When browsing on a potential lender’s site, look for “https://” at the beginning of the web address (or URL), rather than the standard “http://.” Also check for a nearby lock symbol in your web browser, which indicates your connection is secure.

7. You’re being rushed to sign

Taking out a personal loan of any size is a major decision. As such, it shouldn’t be something you rush to complete.

A lender putting pressure on you, especially with “urgent” deals that expire in hours, is an indication of fraud and reason to go elsewhere. Legitimate lenders won’t pressure consumers to move ahead with a loan, and they should have consistent rates and terms.

How to avoid personal loan scams

None of this should be reason to panic. While personal loan fraud is very much out there, being diligent as you shop around for loans will protect you.

In addition to keeping an eye out for the above signs of a personal loan scam, you may:

  1. Read third-party reviews.
  2. Look up the lender on the Better Business Bureau.
  3. Talk to a representative to get a feel for what the lender is like.

Are online loans safe?

While fraud is common online, there’s also plenty of legitimate banking activity happening online. Many lenders including traditional banks allow you to do business with a few clicks. Citibank, PNC and TD Bank are just a few of the institutions that allow you to apply for a personal loan online.

You just have to apply common sense and basic internet knowhow to determine what’s legitimate. And don’t get fooled into a flashy ad for a personal loan with an interest rate much lower than competitors.

Where to find personal loans online

The internet has empowered consumers with the ability to scan for numerous personal loan options. Financial technology tools have driven a surge in personal loan balances.

Whereas you used to have to enter a brick-and-mortar bank branch, you can now do much of your research online to identify the best deal for your situation. In addition to the big banks, look around at credit unions, whose interest rates for personal loans are mostly capped at 18%, while other sources can have much higher rates.

You could also seek out funding through online peer-to-peer (P2P) lending marketplaces, such as LendingClub, Peerform and Upstart. These allow consumers to get the money they need directly from individuals and investors in as little as one business day.

The bottom line

While there are plenty of legitimate online loan options out there, there still scams to look out for. By taking the time to research your options before making a selection, you can avoid falling prey to fraudsters.

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