Disclosure regarding our editorial content standards.
According to the Federal Trade Commission, imposter scams were the leading cause of fraud loss in 2019. These are scams that involve someone pretending to be someone they’re not—such as the representative of a bank—to get your money. Some loan scams fall into this category.
What’s a Loan Scam?
A loan scam is any action that is designed to take your money without providing you a proper service in return. It can include fake loans, which require you to pay upfront without ever receiving loan funds in return, but the term can also be used to cover some loan schemes designed to tempt you into financing that will ultimately leave you without anything gained—often through fraudulent means.
Loan Scams vs. Predatory Loans
Loan scams aren’t the same thing as predatory lending. Predatory lending is, unfortunately, still a valid type of loan, because predatory loans aren’t fraudulent. Lenders who issue these types of loans might not directly explain all the fees and expenses associated with them, but explanations are usually in the fine print.
Predatory loans don’t necessarily aim to trick you out of your money. Instead, they rely on the need of someone with an emergency situation or bad credit. That need can drive people to take on loans with high interest rates that make them especially expensive.
Types of Loan Scams
Loan scams come in a wide variety of types. Here are just a few to look out for.
Personal Loan Scams
One of the most common personal loan scams requires you to pay an up-front fee as part of the loan application. These “loan” offers are typically worded in such a way that implies that once you pay the fee and complete the application you get a loan. They use phrases such as “no credit check” or even “every applicant approved.”
You’re often sent an official looking application that asks for a lot of personal information, sometimes including your Social Security number. After you fill out the application and hand over the money for the up-front fee, you never hear from the “company” again. Sometimes, the phone number you used to contact the company goes out of service.
In this scenario, you not only lose what you paid for the application fee but you have also given the scammers your personal information.
Student Loan Scams
If you’re paying off a student loan, you might receive messages from scammers about student loan debt relief. These offers can be anything from full debt forgiveness to help paying for student loans. It’s worth noting that the Federal Student Aid Office cautions anyone fielding these offers to carefully consider whether these companies or offers are legitimate.
Here are some red flags to look out for:
- The tone of these offers can be aggressive—the scammers want you to think you don’t have time to look into this further and must act immediately.
- They also often ask for payment in return for helping with your student loans, which the Student Aid Office says no credible organization will do.
- They want you to sign a power of attorney form giving another organization the power to discuss your student loans with your lender
- They ask for your FSA ID information or other sensitive personal information, such as your Social Security number.
- Their offers contain spelling or grammatical errors in their emails, print or other forms of communication.
- They promise immediate loan forgiveness or fast results. Like we mentioned above, their messaging may contain a general tone of urgency.
Mortgage Loan Scams
Mortgage loan scammers often target people with existing mortgages who have some existing equity. They try to trick people into applying for cash-out refinance loans or other options by offering seemingly attractive benefits such as a cash advance or credit line. But these loans are structured in such a way that what you pay in fees and interest far outpaces any cash you ever receive.
Other mortgage loan scams can include:
Refinance Schemes
Refinance schemes reach out to people who are in financial distress, such as those recovering from a natural disaster or bankruptcy. Scammers offer a refinance deal that allows someone to get cash back on what equity they have in the home, but the rates and terms make the monthly payments almost impossible to keep up with.
The lender approves the loan anyway, even though the person wouldn’t normally qualify for it. The scammer hopes that the person is unable to make the payments so they can foreclose on the home and take the property.
Deed Scams
Deed scams, which require you to sign over a deed temporarily as collateral for a loan. In these cases, you may never see the deed again or get the loan money. In other situations, you might receive the loan money, but the scammer has made it almost impossible for you to meet the loan terms, so they keep the deed and own your home.
Signs of a Scam
It’s impossible to create a fully comprehensive list of loan scams. That’s due in part to the fact that as soon as word gets out about scams, fraudsters start to invent new ones. So, it’s more important to understand how to uncover these scams on your own. Here are four things that can tip you off.
1. Unsolicited Offers
While many loan companies and credit cards do send legitimate unsolicited offers in the mail, you should always be careful about how you react. For example, instead of responding immediately and calling the number on the offer, find and call a known customer service number for the company to find out if the offer is legitimate. Be careful to work only with known, well-respected lenders whenever possible.
2. Unsecured Websites
Legitimate lenders have secure websites. You can quickly tell if a website is secure by looking at your browser bar. Sites with URLs that start with HTTPS are secure. If the site only starts with HTTP—be cautious. Don’t enter your personal information and do a bit more digging about the company.
3. Advance Fees
Paying a fee up-front is always a red flag when you’re dealing with loans. If lenders are asking you to pay an application fee or processing fee up-front, you may want to back away. At the very least, read all the fine print and understand exactly what you’re agreeing to.
It’s not that some lenders don’t charge these types of fees. However, they’re usually part of a financing deal and embedded in the cost of your loan.
Advance fees are not the same thing as security deposits, however. A good example of this is a credit builder loan. Someone with bad credit who is taking out a credit-builder loan may need to make a deposit to cover the loan. At the end of the loan term and after you pay the loan off as agreed, you get the deposit back.
4. No Interest in Credit History
There are lenders who don’t check your credit history, but they tend to base loans on your income or the collateral you’re willing to put up, such as the title of your car. Even with such legitimate cases, though, you should be careful and read the fine print—you might be paying a high interest rate in return for the lender ignoring your credit history. (In case we haven’t said it enough, always read the fine print.)
The bottom line is that legitimate lenders are in the business to make money. They do that when someone takes out a loan and pays it back as agreed. If the lender doesn’t seem to have any interest in your creditworthiness or whether you have something else to offer that helps reduce its risk, it’s likely that lender isn’t legitimate.
What to Do If You’ve Been Scammed
Even if you’re as aware and careful as possible, you can still get scammed. Fraudsters are smart and ever evolving, and it can be hard to keep up. Here are some steps to take if you’ve fallen victim to a loan scam.
Identify What Information Has Been Compromised
Make a list of all the information you shared. This helps you understand if your identity or other accounts might have been compromised.
Report It to the FTC and the BBB
File a complaint with the FTC and the Better Business Bureau. This can help ensure scammers are investigated and that others can be made aware before they also fall prey to the scams.
Protect Your Financial Information
Change passwords on any accounts that might have been impacted or breached during the scam. Notify your financial institutions that you were the victim of a scam and ask what options they have to help you protect your existing accounts. Contact the credit bureaus to put a freeze on your credit reports, which keeps anyone from being able to take out loans in your name. Ultimately, when it comes to loan scams, the best offense is a good defense. But if you are ever caught up in a scam, act as quickly as you can to report it and lock down your accounts to prevent further losses.
