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Interest in personal loans is rising this year, industry experts say.
Unfortunately, potential scams are rising too.
Amid record-breaking unemployment rates and a staggering economy, consumers are seeking personal loans for two primary purposes: to consolidate credit card debt or simply to get by, says Brian Walsh, CFP and senior manager of financial planning at SoFi, a national personal finance and lending company.
“This is a way to help get them through until they get back to normal,” says Walsh.
Scammers have taken notice. In the first four months of 2020, the Federal Trade Commission (FTC) reported more than 18,000 accounts and more than $13.4 million in losses to COVID-related fraud. Those complaints cover a range of financial scams. But personal loan scams have been a problem since before COVID. Last year, the Insurance Information Institute, a trade group, recorded nearly 44,000 reports about potential personal and business loan scams.
“Unscrupulous people will try to take advantage of people’s needs,” Walsh says. And in the middle of a pandemic that’s putting the economy through the ringer, those unsavory people are finding ample opportunity.
If you’ve determined that a personal loan makes sense for you, the next step is to explore red flags and warning signs of personal loan scams.
Personal Loan Scams Warning Signs
“There are basically two main reasons you could get scammed: people are either trying to steal your money, or they’re trying to steal—and maybe sell—your personal information,” says Jamie Young, managing editor at Credible.com, an online loan marketplace.
Here are some warning signs to watch out for.
Too Good to Be True
“If it sounds too good to be true, it most likely is,” Walsh says. In fact, all the experts we spoke to echoed this sentiment. They agreed if a lender has a guaranteed approval for a fast loan, raving reviews only on their own website, doesn’t care about bad credit, or offers no credit check at all, it’s wise to do a ton of research before you agree to anything.
That might include reaching out to you. “It’s not uncommon for banks to send you offer letters in the mail. But if it’s a bank you’ve never heard of and they’re randomly reaching out to you with a deal seeming a little too good to be true, you should proceed with caution,” says Farnoosh Torabi, NextAdvisor contributing editor and host of “So Money” podcast.
Bad Credit? No Problem
Pre-approvals, guaranteed approvals, or no credit checks seem to be common themes in personal loan scams. If the lender is making guarantees before checking your financial history, be cautious. Guaranteed approvals or no credit checks are possible scams. “A lender needs to do some sort of underwriting to assess and price that loan appropriately. If they’re not doing that, it’s a red flag to me,” Walsh says.
All the experts we talked to said to be wary of advance-fee scams.
“With some personal loans, you’ll need to pay for an application or the origination fee, but that’s going to come from the loan,” says Walsh. In other words, any fees associated with the loan should be covered by the loan itself. If you have to come up with out-of-pocket money, walk away.
Your state’s finance department should maintain a registry of approved lenders. Check it.
These fees are often worded with legitimate terms like “application fee” or “processing fee.” However, these fees are anything but legitimate and often ask you to do things that may seem odd, like purchase a prepaid card, says Anuj Nayar, financial health officer at LendingClub.
“Legitimate personal loan lenders do charge something upfront. It’s called an origination fee, and that’s normal — but it’s taken out of your loan proceeds,” Young says. On the other hand, she says, “advance-fee loans are not legitimate. You should never be giving anyone your money out of your pocket before you get approved.”
Lack of Company Information
Another big alert of a potential loan scam is a lack of information about the lender. Legitimate financial institutions usually have an address and ample contact information on their site. If your lender has no information about their company other than a URL, do some extra digging before you give them any personal information.
Finally, if a lender ever applies any pressure, don’t bend to it. “No one’s going to pressure you if they’re a legitimate lender,” says Young.
“Make sure you aren’t feeling pressure to make a decision today or disclose personal identifiable information like a bank account number, Social Security number, or credit or debit card information,” says Nayar. Reputable institutions will not force your hand or rush the personal loan application process.
How to Vet Loan Providers
Make Sure the Website is Secure
Check the company’s website URL to see if it has HTTPS. The S stands for secure. HTTP (with no S) is not a secure site to handle personal data collection. You want to make sure the site is secure since you will be giving personal information, says Young.
Look Them Up
A reputable financial institution should have information about themselves online. “If you can’t find any information on this company or this product, walk away,” Torabi says. She recommends doing a Google search with the institution’s name and the word “scam” to see what comes up.
“Do some internet sleuthing,” Young says. And Walsh agrees. “Whenever you’re shopping for a financial product, you should read reviews and shop around as much as possible,” he advises. Scour reviews to make sure other consumers haven’t been mistreated by any lender you’re considering. You can check out Better Business Bureau and google “reviews for X company,” Young suggests.
Ignore the Fishy Offers
As our experts emphasized, you may get offers sounding too good to be true. Ignore them. Don’t fall into the trap of big promises of waived credit checks and guarantees for a fee.
Vet Through Government Tools
Government resources are free and “there to help consumers not get taken advantage of,” says Walsh. You can vet your potential lender through one of these sites by typing the name of the company into the search bar. If there are charges against them, one of these sites will report on it.
Federal Trade Commission’s (FTC)
Consumer Financial Protection Bureau (CFPB)
U.S. Public Interest Research Group (PIRG)
The American Bankers Association (ABA)
Check Your State’s Registration Resources
Your state’s finance department should maintain a registry of approved lenders. “With personal loans, it’s about verifying the institution and making sure they’re registered,” Torabi explains. State resources vary; some states issue lender’s licenses, others register them. Look up your state’s system and make sure the lender you’re considering checks out. For example, I searched for “New York state licensed lenders” and reached New York State’s Department of Financial Services. Here you can search for information on licensed lenders in New York.
Shop and Compare Rates.
Compare rates with a few lenders to make sure you’re getting the loan money you need with the lowest interest rate possible. “With any product you shop for, you shop around. Don’t limit yourself to this one offer,” Torabi says.
The Bottom Line
Not only does vetting any financial institution you’re considering protect you from personal loan scams, but it can also help you get the lowest interest rate possible.
Watch out for lenders asking for money upfront or pressure you, especially if you can’t find much info about their company. When in doubt, it pays to go with a lender you know you can trust.