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Personal Loans

How to Avoid Personal Loan Scams

The personal loan market has been growing at a double-digit rate over the last several years. At the beginning of 2023, more than 22.4 million consumers were carrying personal loan balances totaling $225 billion. A market that large is bound to attract a large number of scammers. 

The chances of a personal loan scam increase among consumers with bad credit who have limited choices for accessing personal loans. Understanding how a personal loan works is the first step to being able to spot the telltale signs of a scam.

Types of personal loan scams to be aware of

There are many types of scams involving personal loans, from bait-and-switch tactics to predatory lenders offering terrible loan terms to bad credit borrowers. In some cases, you may receive a loan offer from a scammer masquerading as a lender. They’re really just phishing for sensitive information, like your Social Security Number.

Another trick is to prey on individuals with the promise of a loan in exchange for an upfront application or administrative fee. Unsurprisingly, the applicants never hear back once the fee is paid. 

Finally, high-interest loans with short repayment terms, like payday loans and auto title loans, can be just as harmful as fake loans. Borrowers often get caught in an ongoing cycle of loan renewals with costly interest rates and renewal fees.

Real-world example: Request to return funds through gift cards

When people are in a tight financial spot, they often overlook red flags for the promise of getting approved for a personal loan. Many individuals have reported getting approved for a small loan amount (up to a few thousand dollars) and getting a portion of the sum deposited into their bank account.

The “lender” then denies the loan based on alleged credit score changes and requests that the money be sent back via some type of retail gift card. Eventually, the borrowers and their banks discover the funds were fraudulently deposited and would not have been approved if no further action had been taken. 

The best way to avoid this personal loan scam is to confirm the lender is legally registered with your state. If you’re already entangled in this type of scheme, don’t spend the funds or send any money to the scammer. Contact your bank and alert them of the transaction you think is fraud.

4 ways to spot a personal loan scam

It is much easier to detect when you are in the presence of a scammer if you know what you watch for. Here are the signs you are not dealing with a legitimate lender.

No credit check is required

Any “lender” that says it will issue you a loan without a credit check is likely not legitimate.

All legitimate lenders require a credit check which usually involves a hard pull of your credit report. It’s the only way they can determine whether you pay your bills on time and that you will repay the loan.

Before engaging with any lender, find out what they require in terms of a credit check. If they tell you they don’t check your credit or ask to verify income, walk away.

An advance fee is required

The bottom line is that it is against the law for a lender to promise to issue you a loan in exchange for a fee. Some legitimate lenders may charge an application or loan origination fee but those are usually deducted from the loan amount.

If you are ever asked to send money in advance of receiving a loan, you are likely looking at a scam.

The lender has no physical location

When working with an online lender you may never visit a physical location, but you should at least make sure it has one before moving forward.

Search the website for the lender’s corporate address. If none is listed, then it’s a red flag. Even if one is listed, you should cross-check it by Googling the lender to see if the same corporate address pops up. The lender should also be registered in every state it claims to do business in. 

High-pressure sales tactics

Many fake lenders put a lot of pressure on you to make a decision and accept the supposed loan offer. They’ll likely make you feel like the offer is going to expire if you don’t immediately sign the paperwork.

Avoid doing business with any lender who doesn’t give you time to consider your finances and compare other options. It’s likely a fake business you’re really dealing with.

Real-world example: Requirement to enter your banking credentials

Technology can be an amazing thing, but it also opens the doors to a lot of new scams. While most legitimate lenders do ask for your bank account and routing numbers to deposit the loan funds, avoid giving out sensitive banking details like your online username and password. 

Many people are reporting an extra step in the personal loan application process: logging into their bank account through the “lender’s” portal. And while some legit lenders use third-party services to verify income this way, you don’t have to use it. Even a real lender can get hacked and have your bank login data stolen. 
Banks recommend avoiding sharing your login information with anyone, even if it seems like a real lender just trying to verify your account. Instead, there should be a manual option if the lender is real. If you’ve already logged in and aren’t sure if the lender was reputable, contact your bank to freeze your account. 

5 steps to avoid falling for a personal loan scam

Follow these five steps to verify you’re working with a legitimate lender. A little upfront research can save you a major headache later on.

Research the lender

If you’ve gotten this far, you need to check with the Better Business Bureau (BBB) for any complaints. If the BBB isn’t tracking the lender, it’s probably not a legitimate organization. If it is tracking the company, you can see if any complaints have been filed. If the BBB rating is anything less than a B you should probably walk away.

Also, check to see if the lender is a registered business in your state. You can also look at third-party review sites to see what other borrowers have said about their experience. 

Question guaranteed approvals

Legitimate lenders typically don’t offer guaranteed approvals for personal loans. They’ll check your credit score and existing debts, plus verify your income to make sure you can afford the monthly payments. 

Payday loans and title loans are a type of predatory lending that may be “guaranteed” as long as you use your paycheck or car title as collateral. This can turn into serious consequences, including losing your car or going further into debt if you can’t keep up with payments. 

Never pay money upfront

Some lenders do charge administrative or origination fees as part of the application process. But they never ask for any money upfront. Instead, they either deduct those fees from the loan proceeds before you receive them or add them to the total loan balance.

If a lender asks for payment, walk away and look for another method of financing. 

Consider the contact method

Legitimate lenders have a variety of advertising methods, including online ads or emails. It may be hard to distinguish between what’s real and what’s fake. If you’re unsure, look up the real lender’s customer service number and confirm that they really did reach out to you.

Most real lenders never call to try and get you to apply for a loan. If you do get a call, use the same strategy to call back the advertised number online and see if it’s real. 

Ask the right questions

A legitimate lender should be transparent with pricing, rates, and terms. Ask questions about the details of the following loan elements:

  • Interest rate cap
  • Prepayment penalties
  • Origination fees
  • Any other fees 

Make sure this information matches the details listed in your loan agreement and that you fully understand them.

Real-world example: Unsolicited personal loan approval

Another personal loan scam is an approval letter for a loan you didn’t apply for. The fake lender may claim to need personal information in order to deposit the funds—like your bank account details or Social Security Number.
Avoid any correspondence at all with these scammers. They are either trying to phish your financial information or temporarily deposit fraudulent funds into your account. 

If you do pass on your information, contact your bank immediately to alert them. They can freeze your accounts and reject any incoming funds you don’t expect.

What to do when you encounter a scam

If you are the victim of a personal loan scam you need to act quickly. Follow these steps to limit the amount of potential damage to your bank accounts and credit reports.

  1. Contact your bank: If you paid any funds to a fake lender via your bank account or credit card, contact your financial institution to initiate a transaction reversal. 
  2. File a police report: Contacting your local police can help move the investigations forward. Whether you had funds stolen or identity fraud, this is a crucial step.
  3. Contact the ICCC: Your next stop should be the Internet Crime Complaint Center (ICCC). They collect scam information to help the FBI respond faster and identify potential culprits.
  4. Monitor your credit report: Report identity theft to Also, monitor your credit report for any unauthorized loans or credit cards in your name. Credit monitoring services are inexpensive—$10 to $20 a month—or sign up with a free service. You can also temporarily freeze your credit to prevent any new credit checks performed on your account. 

How legitimate personal loans work

Knowing what is supposed to happen when you apply for a personal loan is also helpful to ensure you’re getting a legitimate product. 

A personal loan is typically unsecured, meaning that it doesn’t require any collateral. The lender must rely on the borrower’s creditworthiness and ability to repay the loan to make a lending decision—hence the need for a hard credit check. 

When you apply for a loan you will be asked for a few things:

  • Your Social Security number.
  • Your bank account information
  • Your employment status. 

Legitimate lenders do not charge any upfront fees for submitting an application. Once you’re approved, expect to receive a loan agreement that details the loan limit, interest rate, and any loan fees

The agreement should also include the lender’s contact information and the name and location of the financial institution that is actually funding the loan. The loan is not effective until you sign the agreement. Thoroughly review all of the information in advance to ensure you understand the terms and that everything is correct.

Check out our best personal loan lenders page to see our top picks based on our editorial ratings.


Are there specific types of personal loans that are more susceptible to scams?

Loans offering no credit check or guaranteed approval are more likely to be fraudulent. The last few years have also revealed many student loan forgiveness scams for both private and federal student loans. 

What are the legal implications of falling for a scam?

Depending on the type of scam, you could have your identity stolen, funds stolen from your bank account, and your credit score damaged. You may have to navigate the legal system to prove any charges or lost funds were really fraudulent. 

You may also be legally responsible for any new loans or credit cards opened under your name. 

Can you recover lost money from a loan scam?

It depends on how the funds were lost. Ideally, your bank will help reverse any fraudulent transactions (such as a debit or wire transfer) before they are permanent. That’s why it’s so important to act quickly when you’re the victim of a scam. 

For credit card charges, you may be able to have those charges reversed so you don’t owe the balance. 

What should you do if a friend or family member is considering a loan you think is a scam?

Point them to resources that confirm the validity of a lender. These include the BBB, third-party customer review sites, and your state’s business registration database.

Can poor credit make you more susceptible to loan scams?

Yes, unfortunately, many scammers target lower-credit individuals because they may have a greater need for the money. It’s still important to carefully review any terms and conditions and look for red flags. 

Also remember that even if a lender is legitimate, their loan offer may still have predatory terms and conditions that aren’t a good idea.