Updated
May 09, 2023 The personal loan market has been growing at a double-digit rate over the last several years. At the end of 2016, more than 15 million consumers were carrying personal loan balances totaling $102 billion.
A market that large is bound to attract a large number of scammers, especially with the growing number of people using the Internet to access personal loans.
The chances of encountering a personal loan scam increases among consumers with bad credit who have limited choices for accessing personal loans. They are most susceptible because they tend to overlook some of the subtle signs of a scam when presented with the opportunity to get a loan.
Understanding how a personal loan works is the first step to being able to spot the tell-tale signs of a scam.
On this page:
- How Personal Loan Scams Usually Work
- How to Spot a Personal Loan Scam
- What to Do If You Encounter a Scammer
- How Legitimate Personal Loans Work
How Personal Loan Scams Usually Work
Although anyone can be a potential victim of a scam, it is the borrowers with bad credit who are heavily targeted. Having been denied by multiple lenders, they are more likely to respond favorably to a bad credit loan offer.
The typical loan scam involves a promise to issue a loan in return for a fee advance. The fee, which the scammer might call a loan origination fee or an insurance fee, can be as low as $50 or as high as several hundred dollars, depending on the loan amount.
The borrower is instructed to send the money, typically using a pre-paid debit card, and is promised funds once the money is received by the scammer. But the funds never arrive. By the time the borrower realizes they have been scammed, the scammer is long gone with the money.
How to Spot a Personal Loan Scam
If you know what is supposed to happen when you apply for a personal loan then it is much easier to know when you are in the presence of a scammer. Here are the signs you are not dealing with a legitimate lender.
No Credit Check 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 is 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, walk away.
Advance Fee 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 looking at a scam.
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.
Check With the Better Business Bureau
If you’ve gotten this far, you need to check with the 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.
What to Do When You Encounter a Scammer
If you are the victim of a personal loan scam you need to act quickly. You should first file a police report with local law enforcement. Your next stop should be the Internet Crime Complaint Center. Finally, start monitoring your credit report. Credit monitoring services are inexpensive – $10 to $20 a month – or sign up with a free service.
How Legitimate Personal Loans Work
A personal loan is typically unsecured, meaning that it doesn’t require any collateral. That means the lender must rely on the borrower’s creditworthiness and ability to repay the loan to make a lending decision.
Any legitimate lender that wants to ensure its loans are repaid will require a hard pull on your credit. Most use your credit score as a determining factor, but they will also want to know that you have a stable source of income.
When you apply for a loan you will be asked for your Social Security number, your bank account information, and your employment status. Legitimate lenders do not charge any fees for submitting an application.
Once you’re approved expect to receive a loan agreement which details the terms, the interest rate, and any loan fees. It also specifies the loan repayment amount and the date on which the payment is due.
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. If you are obtaining personal loans online, the agreement can be signed electronically. Before signing the agreement, you should thoroughly review all of the information 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.