Loan Scams: 6 Warning Signs You Need to Know
Guaranteed approval, fee-based help for your federal student loans, and upfront payment should all set off alarm bells.
When you’re in desperate need of cash, it can be easy to look for the fastest solution. Unfortunately, doing so will open you up to a whole host of predatory lenders and outright scammers. Desperate people, especially ones with low credit scores, often make the easiest marks.
Between con artists who demand payment upfront and then disappear to predatory cash advance loans designed to trap you in a dangerous cycle of debt, there’s a lot you have to watch out for. Applying for a loan with one of these companies could dig you even deeper into debt.
But don’t worry. That’s why we’re here. Before you venture online or pick up the phone, make sure you know these warnings signs for when a fast-cash loan is actually fast-talking scam.
1. Watch out for upfront or “advance” fees.
There’s a reason that we made this warning sign number one. Even if you decided to skip the rest of this post (please don’t do that), you would be okay coming away with this one piece of knowledge.
Lenders that ask you to pay money upfront before they deliver your loan or make noise about “advance fees” are scamming you. Once you pay them that money, they are going to melt away, leaving you with an even bigger hole in your wallet than when you started.
While it is customary for many personal loans to include origination fees as a part of their lending process, those fees are often deducted from the loan amount—not demanded up front before anything’s been agreed upon. (Mortgages also come with a number of additional fees.)
Other hallmarks of an advance fee scheme include requests that you pay the costs of transferring the funds, demanding that payment is made via wire transfer, or encouraging you to make payments via a prepaid debit card or other gift cards.
But before you even reach any of those other warning signs, you should be tipped off by any demand of a fee prior to the loan being approved.
2. Don’t fall for promises of “guaranteed approval.”
This promise often goes hand in hand with an advance fee scheme. By telling their mark that they can get a loan no matter how dire their financial situation, scammers can more easily dupe them into paying them.
If a lender tells you that approval is guaranteed, then they are not being truthful with you. A real lender always has some kind of condition for issuing a loan. Even if the loan is very easy to get approved for, it’s still not “guaranteed.”
But don’t take it from us. According to the Federal Trade Commission (FTC), “Legitimate lenders never “guarantee” or say that you are likely to get a loan or a credit card before you apply, especially if you have bad credit, no credit, or a bankruptcy.”
Even if a lender that promises guaranteed approval ends up issuing you a loan, that doesn’t mean that you’re out of danger. It might be a sign that the loan is a first step to trapping you into a long-term cycle of debt. To learn more, check out our blog post: Is Guaranteed Approval A Real Thing?
3. They don’t check your credit history or income.
Real lenders don’t offer guaranteed approval for one simple reason: they care about your ability to repay what you borrow. That’s why they take steps to verify your credit history and your income before approving your loan. If you have good credit, every loan you apply for will involve some kind of credit check.
The same doesn’t hold true for bad credit loans and no credit check loans. If you have poor credit and are applying for one of these loans, you need to have your guard up. And even if a lender doesn’t make splashy promises of guaranteed approval or demand an advance fee, you can sniff out their trustworthiness by whether or not they check your credit history.
It doesn’t have to be a hard credit check. A soft check will do just fine. Plus, a soft credit check won’t show up on your credit report and dent your credit score. Sure, they return a lot less information than a hard check, but they return way more information than no credit check at all.
When a lender doesn’t verify your credit history or income, it might be a sign that they’re hoping you can’t afford your loan. In situations such as these, the lender is counting on a lot of their customers being forced to roll their loans over—paying additional fees and interest to get an extension on the due date.
When a person is continually rolling or reborrowing a loan, it makes it very hard for them to climb out of debt. Instead of paying off their principal loan amount, they’re only ever paying off the interest. Imagine spending $1,000 in interest on a $300 loan and then realizing that you’re no closer to paying it off than you were when you first began.
If a lender doesn’t check your credit history or try to verify your income—whether it’s a short-term loan or a long-term installment loan—it’s not too much to assume that a predatory cycle of debt is right around the corner.
4. Beware promises around loan “forgiveness.”
These scams often center around student loans. And while the state of student debt in this country is massively screwed up, these people are not making it any better. In fact, they’re profiting off other people’s misery and desperation.
Most of these folks aren’t lenders. Instead, they are “student debt relief” companies that promise to help ease your federal student loan burden. They promise lower monthly payments and sometimes outright loan forgiveness, and they will request a fee for their services.
But here’s the thing: Anything they say they can get you can actually be gotten for free. And don’t believe these companies that say they are aligned with the federal government. They are not.
There are a bunch of different claims that these scammers will make in order to get you to use their services. From the U.S. Department of Education:
Here are some examples of the false claims made in these communications:
- “Act immediately to qualify for student loan forgiveness before the program is discontinued.”
- “You are now eligible to receive benefits from a recent law that has passed regarding federal student loans, including total forgiveness in some circumstances. Federal student loan programs may change. Please call within 30 days of receiving this notice.”
- “Your student loans may qualify for complete discharge. Enrollments are first come, first served.”
- “Student alerts: Your student loan is flagged for forgiveness pending verification. Call now!”
Instead of working with one of these companies whose fees and deceptive practices could leave you much worse off, you should go straight to the Federal Student Aid website, where you can find information on loan forgiveness, debt consolidation, lowering your monthly payments, and getting out of default, all for free.
5. Loan scammers will lie about their identity.
This advice is two-fold. Many scammers will lie about who they’re representing. They’ll say they’re from a bank or another reputable lender, or they will say that they are a partner of the federal government. This is often the case with companies that are trying outright trick you through an advance fee scheme.
Other times, a lender will contact you—an actual lender, albeit one who is decidedly predatory—and tell you that you are eligible for a loan with them. The only problem is that you live in a state where loans like the ones they’re offering (usually high-interest payday loans or title loans) are illegal. This lender is breaking the law and shouldn’t be trusted.
When you’re shopping for a loan, especially an online loan, you need to do your research to make sure that you’re not being scammed. Don’t trust the numbers or websites that the lender gives you. Do some snooping and independently verify that the information they’ve given you is accurate.
Sometimes, a cursory Google search is the only standing between you and some real financial hardship.
6. Beware of companies that contact you, especially over the phone.
It’s not just you. A recent article in The New York Times confirmed that robocalls and phone scams are calling your phone more now than ever before. Amongst those callers are many folks claiming to be from a legitimate lender with a fantastic loan offer for you. Don’t believe them.
Real lenders don’t call you out of the blue asking if you want a loan. While many legit lenders might have an over-the-phone part of their application process, it’s only going to be after you’ve applied for a loan or expressed a direct interest in being contacted.
If a lender contacts you out of the blue, the odds are extremely good they’re, well, up to no good. According to the FTC, “It is illegal for companies doing business by phone in the U.S. to promise you a loan or credit card and ask you to pay for it before they deliver.”
A phone call is also an extremely good place to give out false information—to lie about your name, affiliations, address, and contact info. Don’t be taken in. Any lender who contacts you and promises a loan should get only one response: the click of you hanging up.
To learn more about keeping yourself safe from scammers, check out these related posts and articles from OppLoans:
- 10 Common Scams: How They Work and How to Avoid Them
- Multi-Level Marketing Scams: How a MLM “Job” Could End Up Costing You Thousands
- How to Avoid Scam Contractors and Fake Charities Post-Natural Disaster
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