8 ways to spot personal loan scams and protect your finances

Scams have become increasingly sophisticated, often targeting individuals who are most vulnerable and in need of financial support. Falling victim to these schemes can lead to devastating financial losses and emotional stress. Recent reports indicate consumers lost more than $10 billion to fraud in 2023 alone.

While investment scams were the largest contributors, personal loan scams were also included. Often, scammers lure the needy to hand over personal information or pay upfront fees to gain quick access to a loan.

Recognizing the signs of a scam can help you make safer financial decisions, protecting your finances and personal information.

How to recognize signs of loan scams

With personal loan scams increasing, it’s more important than ever to do your due diligence and keep a sharp eye out for potential signs of fraud.

Celia Winslow, executive vice president of the American Financial Services Association (AFSA), offers simple advice to avoid potential scams: If it sounds too good to be true, it likely is.

Consider the following tips to help you recognize loan scam red flags.

1. Unrealistic guarantees for approval

One of the most obvious signs of a loan scam is the promise of guaranteed approval. Legitimate lenders require a thorough review of your financial details, including credit history, income and other relevant information, before offering approval. This process helps them assess your ability to repay the loan.

If a lender guarantees approval without evaluating your financial situation, it’s a clear red flag.

Scammers often offer loans with approval guarantees to consumers with poor credit histories or financial difficulties, hoping they’ll fall for an offer that’s too good to be true. if you’ve been denied a loan due to your financial status, consider improving your credit. You might also want to work with a top-rated credit repair company if errors are causing your score to be low.

2. Upfront fees and hidden costs

Unexpected upfront costs are a warning sign of a personal loan scam. Reputable lenders typically do not require payment before disbursing loan funds.

Instead, lenders deduct the fees from the loan amount they give you or include them in the repayment terms. The fees that are charged should be clearly stated.

Scammers may try to justify upfront costs by calling them “processing” or “insurance” fees, only to disappear once you’ve made the payment. If you get “approval” for a loan that depends on immediately paying the lender, it’s probably time to walk away.

3. Pressure to act immediately

Scammers often employ high-pressure tactics to convince people to make hasty decisions. This will often be in the form of limited-time offers or proposals with consequences if they’re not accepted immediately.

Scammers may even threaten or pressure people with legal action or other negative repercussions if they don’t act immediately. Legitimate lenders value informed decision-making. They are usually willing to give people the time and information they need to weigh their options carefully.

If you’re pressured to act immediately without enough information or feel uncomfortable about a lender’s sales tactics, look at other options.

4. Unsolicited loan offers

Receiving an unsolicited loan offer — whether via email, text message or social media — is a strong indicator of a potential scam. Be especially wary of phone calls offering loans, as it’s illegal for telemarketers to propose a loan or credit over the phone while demanding upfront payments.

Legitimate lenders rarely engage in unsolicited outreach. Instead, they typically employ traditional marketing methods and rely on consumers to initiate contact when interested in a loan. Social media, in particular, has become a hotspot for cybercriminals looking to exploit vulnerable individuals.

If you’re considering a personal loan, take the time to thoroughly research your options and use a trusted loan aggregation platform or reach out directly to lenders through the lender’s verified contact information to ensure you’re dealing with a legitimate entity.

5. Vague or absent contact information

Legitimate lenders use transparent communication channels and offer contact information so borrowers can reach them with inquiries or concerns.

Scammers often avoid listing contact information, making it difficult for people to get their money back once the relationship turns sour. Always do your due diligence and verify potential lenders’ contact information before applying for a loan.

6. Lack of physical address

A lack of a physical address may be a significant red flag when evaluating a potential lender. Legitimate lenders, even those operating primarily online, typically provide a verifiable mailing address as part of their contact information.

Scammers often avoid listing physical addresses to maintain anonymity and evade accountability. Proceed cautiously if you cannot verify a lender’s location with basic online research.

7. No registration or license

To legally offer you a loan, a lender must be registered and licensed in your state. If the lender can’t or won’t verify its registration or license status, you’re probably dealing with a scammer.

The FTC suggests contacting your state attorney general or banking and financial services regulator to confirm whether or not a lender is registered in your state.

8. Unsafe websites and requests for personal information

You should always make sure that any website that requests your personal or financial information is secure and properly encrypted. Look for indicators such as “https” in the website address (not just “http”) and a padlock icon in the browser bar signaling a secure connection.

If you’re uncomfortable with a website’s security protocols, it’s a good sign you shouldn’t fill out the application.

Steps to take if you suspect a loan scam

If you suspect a loan scam, take the following steps as soon as possible to protect yourself from further harm and mitigate potential losses:

1. Cease communication: First and foremost, it is wise to stop communicating with and making payments to the scammer. If you’ve already given them any payments or information they could use to commit identity theft, take steps to secure your information.
2. Gather evidence: Gather detailed information and any evidence of the scam. The more details you can remember, the easier it is to report the scam and take the next steps to protect yourself.
3. Report the company to the relevant authorities: These may include the FTC, Consumer Financial Protection Bureau (CFPB) or local law enforcement agencies.
4. Check for loss coverage: Review your homeowners or renters insurance policy to see if it includes fraud or identity theft coverage. While this insurance typically covers the costs of resolving identity theft issues, it may also provide valuable support if a scam has targeted you.

How to find a reputable lender

Being proactive is the best way to avoid falling victim to a loan scam.

If you get a personal loan by applying to reputable lenders yourself, you’re far less likely to get scammed. However, it’s also important to be wary of ads that may be the work of untrustworthy lenders or scammers. Before submitting personal information to a potential lender, check for red flags, verify the lender’s information and confirm their regulatory and licensing compliance.

Remember that any lender worth trusting will take the time to walk you through the loan details down to the fine print. They will not pressure you to decide or hide their address or contact information.

Winslow says, “When in doubt, turn to a wide range of lenders who operate brick and mortar branches or offices, where customer service staff can sit down and walk a consumer through the loan process and answer any questions.”

The bottom line

Loan scams are getting more sophisticated, so it’s important to watch for warning signs. Stay informed about the latest tactics used by scammers, and don’t ignore the red flags, no matter how tempting the offer may be. Remember that offers that promise guaranteed approval, come unsolicited or demand upfront fees are often scams.

Protect yourself by seeking out lenders that prioritize transparency, offering full disclosure of information. If you suspect a scam, report it immediately to the relevant authorities to help prevent others from falling prey.

Frequently asked questions

• Are all unsolicited loan offers scams?

  Not necessarily. Some lenders may send prescreened offers of credit. But if a loan falls into your lap, do your due diligence to verify that it isn’t a scam. Pay close attention to the terms of the credit and ensure that it is coming from a licensed lender.

• What are the dangers of falling for a loan scam?

  Scammers can use your information to commit identity theft, open fraudulent accounts or make unauthorized transactions. They may also sell your data on the dark web for others to misuse.

• How do I find a legitimate lender for a personal loan?

  To find a legitimate personal lender, start by looking at unbiased reviews. Many reputable sites, including Bankrate, offer personal loan reviews. You can read about borrowers’ experiences before sharing any personal information.