App version: 0.1.0

Personal Loan Scams: How to Spot Them and Avoid Getting Scammed

Personal Loan Scams: How to Spot Them and Avoid Getting Scammed
Lauren Ward
Lauren WardUpdated June 8, 2022
Share this article:
Editor’s note: Lantern by SoFi seeks to provide content that is objective, independent and accurate. Writers are separate from our business operation and do not receive direct compensation from advertisers or partners. Read more about our Editorial Guidelines and How We Make Money.
Personal loan scams are easy to fall for, yet can be very difficult to recover from. This is especially true if you have no real means of getting in touch with the person or alleged company who robbed you of your money. Unfortunately, personal loan scams are becoming increasingly common. If you’re shopping for a personal loan, here’s what you need to know about personal loan scams, including the most common types of scams, who’s most at risk, and how to spot an illegitimate lender right off the bat. 

What Are Personal Loan Scams?

Personal loan scams come in a variety of forms, but the scammer’s goal is usually to do one of two things: obtain your personal information or obtain money from fake processing fees or collateral requirements. Scammers often have extensive knowledge of how personal loans work, which enables them to come off as legitimate lenders and fool would-be borrowers. Fortunately, they tend to use many of the same tactics, which means there are some key tip-offs you can look for (and steer clear of) when shopping for a legitimate personal loan. 

Who Is Most at Risk for a Personal Loan Scam?

Personal loan scam artists tend to target people who fall into one of two camps: Those who are unsuspecting, such as older people or young people with no borrowing experience; and those who have had trouble getting a personal loan through conventional means, such as borrowers with a lot of debt and people with bad credit.Those who fall into the bad credit category may be able to find personal loans for poor credit. from reputable lenders. However, they typically come with higher interest rates, which can make a great deal on a “no-credit-check loan” particularly attractive. Indeed, fraudsters who peddle bad credit personal loan scams will often buy lists of people who have searched or applied for “no credit check,” “payday,” or “bad-credit” loans online, since they can be an easy target.

Common Types of Personal Loan Scams

Personal loans scams often have certain traits in common. Here are a few common loan scams to be on the lookout for.The no-credit-check scam: While there are legitimate loans for poor credit, a lender that promises they will never check your credit is a red flag – credit history is a major factor in assessing the risk of a borrower.The loan fee scam: You’re offered an appealing, low-cost loan, but first you need to pay hundreds or thousands of dollars in fees. Once you pay these fees, they cut off contact and never provide any funds.The student loan forgiveness scam: While the federal government offers student loan forgiveness programs for federal loans, any private company that comes to you with the promise of forgiving your student loans is highly likely to be a scam.The debt consolidation scam: While debt consolidation can be a smart – and legitimate – way to manage your outstanding debts, any debt consolidation company that is being pushy or advising you to stop communicating with your creditors is most likely a scam.Recommended: Predatory Lending: What Is It? How Can You Avoid It? 

Tips to Identify a Potential Personal Loan Scam

Fraudulent lenders often come off as trustworthy and legitimate, which is what makes them so successful. Here are 10 tip-offs that a deal that sounds too good to be true really is.

1. Lender Contacts You

Reputable lenders may follow up on a loan inquiry initiated by a borrower, but that’s different from an unsolicited invitation to take out a loan. If you ever receive a phone call or personal letter or someone comes to your door, consider the loan offer a scam. According to the Federal Trade Commission (FTC), it’s illegal for a lender to offer a loan over the phone, and then ask for payment before any money has been disbursed.

2. Pressured Into a Loan

There should never be a sense of urgency to sign a loan agreement. Loan officers who work with legitimate lenders don’t rush applicants to close a deal. If you encounter a lender offering a deal that’s only good for a day or so, it may not be in your benefit to continue the conversation.  

3. Guarantees Loan Approval

Many scams, including online personal loan scams, offer guaranteed approval. However, no legitimate loan company would ever make such a claim before looking at a borrower’s personal information. If a lender guarantees your approval without knowing anything about you, consider that a huge red flag. All lenders use some method to assess a person’s financial situation. While there are reputable lenders that offer loans for bad credit, these lenders will still ask for information, such as your income, employment information and education, before offering you a loan.

4. No Fees Disclosed 

Reputable lenders always disclose fees with the borrower before the application process begins. Scammers are well known for not disclosing any fees applicants will pay, even if directly asked.

5. Upfront Fees

Scammers like to state that borrowers are guaranteed to qualify for a loan product, but that they must first pay a processing fee to get the loan moving. This is an outright scam only meant to rob borrowers of the amount they use to pay for the “fee.” 

6. Prepaid Card Payment Option 

Sometimes scammers claim to need a prepaid debit card or a gift card up front to cover the cost of collateral or fees, but no reputable lender would require this from any borrower.   

7. Lender Isn’t Registered with the State

The FTC requires all lenders to register in every state in which they do business. Any lender contacting a borrower must be legally authorized to operate in that borrower’s state. If you’ve never heard of the lender, verify it is a legitimate lender by checking with state records.

8. No Credit Check

Typical personal loan requirements include the lender checking your:
  • Identity
  • Credit score
  • Debt-to-income ratio
  • Income 
  • Employment
At the very least, the lender will usually look at your personal credit report to see if you have a history of paying your bills on time and are responsible with your debts.If a lender contacts you and says that they don’t need to verify any of your personal information, walk away and look into other personal loan options. Reputable lenders always verify your qualifications.  

9. No Website 

An online presence is practically mandatory for a lender to communicate with prospective borrowers in today’s market. Without a website, companies are unlikely to survive. Every reputable lender has a website or, at the very least, some sort of online presence (whether it be a Google My Business account or online reviews). Be wary of any lender that does not have any web presence. Recommended: What Is a Loan Shark? Definition & Examples

10. No Physical Address

A legitimate lender always has a physical address. This even holds true for online lenders. While they may not have physical locations all over the country, they should have a brick-and-mortar office somewhere. If you’re working with a lender that doesn’t advertise a physical location anywhere in the U.S., consider that a warning sign. You will need a physical address for legal purposes should there ever be any issues with your loan. Even when they do list a physical address, it’s a good idea to check in with Google Maps just to be safe. Some scammers will list addresses that are actually vacant lots, so it can pay to double check.

What to Do if You Have Been Scammed

If you believe you are the victim of a personal loan scam, take the following steps to protect yourself and others:
  1. Place a fraud alert with the credit bureaus. This informs creditors that you may be a victim of fraud and that they should contact you to verify your identity before issuing any new credit. If you place an alert with one bureau (TransUnion, Equifax, or Experian), it will be placed on all three. 
  2. Contact your bank as soon as possible. If you paid any fake loan processing fees, contact your bank. It may be able to retrieve your money if you report the incident fast enough. 
  3. Gather as much documentation and correspondence as you can. Save all emails, paperwork, and any kind of screenshot that could be helpful and give copies to authorities. 
  4. File an official police report with your local enforcement. It’s important to have an official record in case you are ever successful in getting the fraudster to court. 
  5. File a complaint with government agencies and crime reporting centers to protect others like you. Give the following centers as much information as you can to help prevent the scammer from hurting anyone else:
  6. If the scammer has a website, report it to major search engines. Companies like Google, Bing, Yahoo!, and DuckDuckGo may remove the website from search results after investigating a scam complaint. 

Searching for a Safe Personal Loan

Even if you have less-than-stellar credit, you are likely eligible for many types of personal loans from good and trustworthy lenders. Here are some ways to vet any lender you're thinking of reaching out to or working with.
  • Look for contact information. Make sure that the lender's phone number, email address and physical address are available on their website, even if it’s an online-only lender.
  • Read reviews. Check Google and Yelp for comments and reviews from previous customers.
  • Check with the Better Business Bureau (BBB). This way you can find out if there have been any complaints against the lender. The BBB can also be a good source for customer reviews.
  • Make sure the lender is registered. If the lender is legitimate, it will be registered with the state. Contact your state’s attorney general to make sure.

The Takeaway

You can avoid personal loan scams if you know what to look out for. The most important safeguards: Always verify a lender is listed with your state; never pay any kind of fee online or over the phone for a loan you have not received; and never provide your social security number over the phone. If you suspect you are the victim of a personal loan scam, contact local authorities, one of the three credit bureaus, and your bank right away.If you’re looking for an easy way to find legitimate personal loan options, Lantern by SoFi can help. With our online lending platform, you can quickly access personal loan offers from our trusted network of lenders.

Frequently Asked Questions

Who is most at risk for a personal loan scam?
How do I know if I’m being scammed for a loan?
How do you avoid loan scams?
Photo credit: iStock/Pixelimage

About the Author

Lauren Ward

Lauren Ward

Lauren Ward is a personal finance expert with nearly a decade of experience writing online content. Her work has appeared on websites such as MSN, Time, and Bankrate. Lauren writes on a variety of personal finance topics for SoFi, including credit and banking.
Share this article: