Concerned about illegitimate lenders?

Common Loan Scams and How to Avoid Them

In recent years, the number of lenders and credit brokers operating solely online has grown significantly. While many of these online lenders are legitimate and trustworthy, the rise in online financial services has unfortunately also led to an increase in scams. These scams often target vulnerable individuals who are seeking personal loans, particularly during financially stressful times, such as around holidays or after receiving unsolicited loan offers.

This guide will help you identify the most common scams, including loan fee fraud, credit checks, personal loan scams, and loan fraud, and provide tips on how to stay safe when looking for a personal loan or any other form of credit.

In This Guide:

• The Growing Problem of Scams
• What Is Loan Fraud?
• Common Types of Scams
• How to Spot Scams
• How to Protect Yourself From Loan Scams
• What to Do if You Fall Victim to a Loan Scam
• Conclusion

The Growing Problem of Scams

With the growth of the internet and online banking, many people now prefer applying for loans online. It’s convenient and quick, allowing individuals to easily access personal loans from anywhere.

Unfortunately, this has also created opportunities for scammers to trick people into paying upfront fees or providing sensitive personal details like bank details or social security numbers.

Loan fraud is particularly concerning because it often results in not only financial loss but also identity theft. Scammers may impersonate legitimate lenders, and once they have your bank details, they may commit identity fraud, leaving you financially compromised.

Common Types of Scams

Scammers employ various methods to trick people into falling for their schemes. Below are the most common types of scams, as well as tips to help you spot them.

1. Loan Fee Fraud

One of the most widespread scams is loan fee fraud. In these scams, a fraudster will promise a personal loan with favorable terms but requires the borrower to pay a fee upfront before receiving the loan amount. The scammer might tell you that the fee is for administration costs, loan insurance, or other bogus reasons.

Once the fee is all paid upfront, the scammer vanishes, leaving the victim without a loan and with no means of recovering the money.

Warning Signs of Loan Fee Fraud

Upfront fees: A legitimate loan company will never ask for an upfront payment before you receive the loan. If a company requests money pay an upfront fee, it’s a clear sign of fraud.

Unclear loan terms: Scammers often avoid providing clear details about the loan amount or interest rate, leaving things vague and hard to understand.

Unsolicited loan offers: If you receive an unexpected loan offer, especially one from a company you’ve never heard of, it’s a warning sign of a loan scam.

2. Personal Loan Scams

Personal loan scams specifically target individuals seeking personal loans. Fraudsters often approach victims by promising guaranteed approval for loans, even for those with poor credit histories. These scams can involve a variety of tactics, including charging upfront fees or asking for personal details that lead to identity theft.

Warning Signs of Personal Loan Scams

Guaranteed approval: No legitimate lender will ever guarantee loan approval, especially if you have poor credit histories.

Requests for sensitive information: Be cautious if a loan company asks for personal details, such as bank details, without a legitimate reason.

Pressure tactics: Scammers often use high-pressure tactics to rush you into agreeing to a loan. They might tell you that you must act immediately or risk losing the offer.

3. Loan Sharks

Loan sharks are illegal lenders who typically charge extremely high-interest rates and penalty fee and may resort to threats or intimidation to recover money. If someone offers you a personal loan with extraordinarily high-interest rates or penalty fees, they could be a loan shark.

How to Spot Loan Sharks

Unregulated firms: Always verify the legitimacy of the lender. Check whether the company is regulated firms listed with the Financial Conduct Authority (FCA) or another regulating body.

Extremely high-interest rates: Loan sharks often charge interest rates that are far beyond what lenders and financial institutions would offer.

No physical address or contact details: If the loan company does not have a physical address or contact information, it is a sign of a potential scam.

How to Spot Scams

Spotting a loan scam early can save you a lot of money and distress. Below are some of the key warning signs to watch out for when applying for a personal loan:

1. Upfront Fees

One of the most prominent features of scams is the request for upfront fees. Be wary of any lender who asks you to pay money before you receive a loan. Legitimate lenders only charge fees after the loan has been granted or processed.

2. Unsolicited Loan Offers

If you receive an unsolicited loan offer, especially via email, phone call, or text message, it's likely a scam. Legitimate lenders do not typically reach out to potential borrowers without prior contact. If you did not initiate contact with the lender, be cautious.

3. Lack of Documentation

Genuine lenders always provide clear, concise documentation that outlines the loan terms, including interest rates, fees, and repayment schedules. If the lender fails to provide this or offers a loan without any documentation, it’s likely a personal loan scam.

4. Fake Websites and Emails

Fraudsters often create fake websites that closely resemble the official sites of genuine companies. These websites might look authentic, but they could be set up to steal your financial details. Always check the URL carefully, and ensure it matches the lender's official website.

5. Pressure to Act Quickly

Scammers often create a sense of urgency by claiming that the loan offer will expire soon or that you must act quickly to secure the loan. Legitimate lenders will never pressure you into making a hasty decision.

How to Protect Yourself From Loan Scams

1. Research Lenders Thoroughly

Before agreeing to a loan to borrow money, research the lender carefully. Check if the company is registered with the Financial Conduct Authority (FCA) or another regulatory body. If the lender is unregulated, it’s a huge red flag.

2. Use Loan Comparison Tools

Using online loan comparison tools can help you find legitimate lenders offering competitive rates without the risk of being scammed. These platforms vet lenders and ensure they are regulated.

3. Check Loan Terms Carefully

Always read the loan agreement carefully, paying close attention to the interest rate, repayment terms, and upfront fees. If the terms are unclear or seem too good to be true, consider it a warning sign.

4. Don’t Share Sensitive Information

Be cautious about sharing sensitive information, like bank details, credit reports, or personal details with anyone you haven’t fully verified. Scammers may use this information to commit identity fraud or steal from all your accounts together.

5. Act Immediately If You Suspect a Scam

If you believe you have fallen victim to a loan scam, it’s important to act immediately. Report the scam to the Financial Conduct Authority (FCA), and contact your bank to ensure that no further unauthorised transactions take place. It may also be helpful to notify credit agencies or the Better Business Bureau.

What to Do if You Fall Victim to a Loan Scam

If you have already fallen victim to a loan scam, it's important to take action quickly:

Report to the FCA: Report the scam to the Financial Conduct Authority at 0800 111 6768 or through their website.

Notify your bank: Inform your bank about any suspicious transactions, especially if you made an upfront payment or bank transfer.

Contact Action Fraud: If you believe that you’ve been a victim of fraud, report it to Action Fraud.

Conclusion

Loan scams can be devastating, both financially and emotionally. However, by staying vigilant and knowing the warning signs of loan fraud, you can protect yourself from falling victim. Always verify the legitimacy of the lender, be cautious about paying upfront fees, and act immediately if you suspect a scam.

With careful research and the use of trusted tools, you can safely navigate the world of online loans and avoid the traps set by scammers.