7 Personal Loan Scams to Avoid

If you need a personal loan, it’s a good idea to be aware of common scams so you can make sure the lender you choose is legitimate, helpful, and committed to its customers.

In this article, we’ve researched the most common personal loan scams to help you become more aware. We also explain how to spot red flags when it comes to lenders and share seven legitimate and highly-rated personal loan companies for you to consider.

7 examples of personal loan scams

If you’re wondering whether something is a personal loan scam, it’s best to trust your gut. The Federal Trade Commission (FTC) reported that consumers lost more than $10 billion in 2023 due to fraud. In other words, financial scams are incredibly common. 

Understanding the most common personal loan scams—here are some examples—is the best way to be prepared.

The clear-your-debt scam

Scammers target people who are in difficult financial circumstances. In this scam, they contact consumers, offering to wipe out their debts and consolidate them into one loan. However, they often ask for a processing or application fee first. When you pay them, you won’t hear from them again.

More sophisticated scammers might even say you must improve your credit to qualify for a loan. They offer to “help” you with this by paying off your credit card balances, but only if you pay them a processing fee using a prepaid card. Of course, once you do, they don’t pay off your credit cards, and you won’t hear from them again.

The gift card/prepaid card scam

Similar to the clear-your-debt scam, scammers will request gift cards or prepaid cards as payment to process your application. For example, the scammer will say the loan comes with processing or origination fees you must pay with a gift card. Sometimes, scammers say your credit is too low to be approved for a loan unless you buy “insurance” with a prepaid card.

The Federal Trade Commission (FTC) explains that scammers will use many different tactics to get you to give them a gift card. This is not limited to personal loans. The FTC says scammers will demand payment, saying they’re from the government, a utility company, and yes, even a dating website.

To avoid this scam, be wary of any company that requests you to purchase gift cards as a payment method. Legitimate lenders would never ask you to do this; however, scammers can be very convincing on the phone, posing as banks willing to help you.

The text message scam

You’ve likely received a text on your phone saying you’ve been pre-approved for a loan. However, reputable lenders will not text you with pre-approval offers. Scammers are hoping you don’t know this and that you’ll click on the link.

Clicking on the links can lead you to fake websites where scammers hope to access your private information. The best way to avoid this is to delete any pre-approval texts, report them as spam, and block the number. Only apply for personal loans on verified, reputable lender websites.

The login scam

Usually, before the login scam happens, a consumer will apply for a personal loan online. Afterward, they’ll get a phone call from someone who poses as the lender and says they must verify their account. They’ll ask for your username and password to confirm your account so they can deposit your loan funds. They will reassure you that you can change your password afterward.

Of course, it seems like the scam would be obvious, but scammers can be incredibly convincing. They can know things about you, including the fact that you applied for a personal loan, which makes them seem more legitimate. A 2022 BBC study says stolen data is commonplace, and it allows scammers as well as predatory lenders to access your data. 

To avoid this scam, never give your bank username and password to anyone. A legitimate lender will ask you to upload your bank statements to a secure platform to verify your account information.

The call-to-confirm scam

Some scammers are adept at using your stolen private data. Like the login scam, they target consumers who have recently applied for personal loans and call them. Except, with this scam, they simply ask to confirm your personal information as part of the loan verification process.

If you get a phone call directly after applying for a loan, tell the caller you’ll call them back. Then, hang up, and call your lender directly. Ask if it’s a common practice to confirm personal details over the phone. Chances are, it isn’t. Again, most lenders have secure platforms for uploading the documents needed to determine your eligibility for a loan.

The micro-debit scam

In this scam, fraudsters access your bank account and deposit money in it. It might be confusing because you might notice a deposit you didn’t make. It might even say it’s from a loan that isn’t yours. If this happens to you, do not spend the money. Contact your bank right away to report fraud.

Scammers do this and contact you asking for the money back, hoping you will wire it to them. Then, they’ll reverse the initial fake deposit and take the money you sent them as a “refund.” Case in point, if there is money in your account that isn’t yours and that you didn’t ask for, contact your bank right away, as it means your account could be compromised.

Deepfake AI scams

Lastly, a newer trend consumers should be aware of is scammers using generative AI to commit fraud. Generative AI is when artificial intelligence programs create text, video, and audio outputs that can mimic real people. 

In February 2024, a finance worker made headlines after fraudsters posed as the company’s Chief Financial Officer in a video call and stole $25 million. A Deloitte Center for Financial Services report forecasted that this type of fraud could reach $38 billion by 2027.

To spot this scam, always double-check the source. Generative AI can mimic bankers and lenders and make requests seem legitimate. If something doesn’t feel right or the information they want seems over the top, trust your gut, hang up, and call the lender directly to confirm if the call is legitimate.

If you become a victim of a personal loan scam, it is important to act immediately to minimize the long-term financial repercussions. Those could be compromised bank or credit card information or your personal, financial, or credit information. Here are the actions to take:

• If you’ve paid the personal loan scammer from your bank account or credit card, contact the institution immediately to cancel the transaction and secure your account from any further fraud. 
• If your personal or financial information is compromised, it’s critical to request a copy of your credit report from the three major credit bureaus and review them for any fraudulent activity. 
• Place a fraud alert on your credit report to inform creditors that you may be a victim of fraud. Creditors will have to contact you to verify your identity and any inquiry activity before issuing any new credit. 

In both cases, the financial institution may need to close out an account and open a new one. This is a time-consuming effort, as you may need to switch over automatic bill payments and your work’s direct deposit. It will be important to track your credit and possibly freeze it if you suspect your data has been stolen. You do not want a fraudster to use your data to open up credit in your name.

Eric Kirste, CFP®

4 red flags to watch for

Here are some red flags to watch out for that might indicate the person you’re dealing with is a scammer.

• Upfront fees: A lender that asks you to pay certain fees upfront before being approved for a loan is a red flag, especially if they ask you to pay those fees with a prepaid card or gift card. Learn about common personal loan fees and charges to identify non-typical fees.
• Unprofessional website or messages: If you visit a lender’s website and it seems unprofessional, this could be a red flag that the lender is not legitimate. True personal loan lenders have secure websites that are professionally designed and maintained.
• Pressure to act quickly: Scammers might pressure you to sign loan documents quickly or tell you that you must accept their terms the same day to qualify for the loan. A legitimate lender knows that it takes time to review terms and upload documents.
• Requests for login information: If someone requests your username and password to your bank, that is a big red flag. Legitimate lenders can verify your account by reviewing your bank statements via a secure portal.

How to avoid personal loan scams

Here are a few tips on how to avoid personal loan scams.

• Do your research: Research the lender’s reputation, license, and accreditation status. Many scammers will create business names similar to well-known lenders to trick you into thinking they have a good reputation.
• Safeguard your personal information: If an offer seems too good to be true, it probably is. Be careful of giving too much of your personal information on applications. Always make sure that a lender is legitimate and has extensive customer reviews before you give them your name, address, and Social Security number.
• Beware of unsolicited offers: Assume any loan offer you get through text or email is not legitimate. Legitimate lenders advertise through traditional means, not text messages.

There are several steps you can take to keep your personal information safe on the web:

1. Create strong and unique passwords. Consider using a password manager to help generate and store more complex passwords securely. 
2. Enable two-factor authentication (2FA) whenever possible to add an extra layer of security to your accounts. 
3. Update browser and account privacy and security settings which may prevent companies from collecting your data in the first place. 
4. If you have social media accounts, update the privacy settings so only permitted contacts can view your information. 
5. Install antivirus/malware protection software. 
6. Enable your firewall on your computer. 
7. Always use a secure connection. If you have access to a VPN, this can help you if you connect to a public WiFi network. Otherwise, avoid connecting to public networks.

Eric Kirste, CFP®

How to choose a reputable personal loan company

Personal loan companies must earn good reputations through positive customer interactions, transparent fees, and fair terms. To choose a reputable loan company, spend time researching customer reviews and reviewing a lender’s accreditation status.

At LendEDU, we choose the best personal loan lenders after a detailed analysis, considering numerous data points. After a thorough review, the LendEDU team assigns a star rating to each lender. 

Companies with a high star rating, like the ones in the chart below, have been vetted. The companies below are legitimate, not scams. However, we still encourage you to do your own research and choose a lender that is best for your personal financial situation.

When choosing a personal loan lender, shop around. Educate yourself on the different features and benefits. Make sure the terms and pricing are satisfactory and that the loan fits your cash flow needs. 

However, it’s very important to use a reputable lender with good service reviews. Consider the lender’s customer service and support, which can significantly impact your experience. Are there a fair number of negative reviews that could impact your decision?

Eric Kirste, CFP®

FAQ

How do scammers get my information for fake loan offers?

Scammers gather personal information through phishing emails, fake websites, data breaches, or by buying your data from the dark web. They may also pose as legitimate lenders or debt collectors to trick you into sharing sensitive details, such as Social Security numbers or bank account information.

Are no-credit-check loans a scam?

Not all no-credit-check loans are scams, but they often come with high rates and fees, making them risky. Scammers frequently use this tactic to lure people with poor credit by promising easy approval and quick funds without verifying creditworthiness. Check out our resource on no-credit-check loans to see the most trustworthy options we found.

What should I do if I suspect a personal loan scam?

If you suspect a scam, stop all communication with the lender immediately. Report the scam to the FTC and your state’s consumer protection agency. Monitor your accounts for unauthorized activity, and consider placing a fraud alert on your credit report.

Can you get your money back if you fall victim to a loan scam?

Recovering money from a scam can be difficult, but act fast. Contact your bank or credit card company to dispute unauthorized charges. Report the scam to the authorities and keep detailed records of all communications. Fraud recovery services may also help in some cases, but success varies.