5 warning signs of a personal loan scam

The coronavirus pandemic has had a significant impact on the economy. While it's starting to decline, unemployment in July 2020 is at 10.2%, according to the U.S. Bureau of Labor Statistics. And more than a million people filed an initial claim for unemployment benefits during the week ending August 22, 2020, according to the Department of Labor.

But be on the lookout for warning signs of a personal loan scam. During times of uncertainty, scammers may prey on people’s fears. In 2019, consumers reported losing more than $1.9 billion due to fraud, according to the Federal Trade Commission (FTC). Common scams include student loan relief, debt consolidation, and credit repair, which cheat consumers out of money and damage their credit in the process.

As you start to explore your loan options, keep an eye out for red flags that a personal loan offer could be a scam. There are at least five loan scam warning signs:

1. Guaranteed loan approvals
2. The lender hides or changes its fees
3. The lender isn’t registered in your state
4. The lender requires an immediate commitment
5. The lender demands a prepaid credit card

1. Guaranteed loan approvals

To determine the terms and amount of a loan — especially for a large loan — lenders need to assess a borrower’s risk by looking at their credit score, income, and employment history.

If a loan offer touts “guaranteed approval” or "no credit score required," it could be a scam. While having low or bad credit doesn’t necessarily mean a borrower can’t qualify, legitimate personal loan lenders don't advertise guaranteed loan approvals without thoroughly reviewing a borrower to understand their own risk.

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2. The lender hides or changes its fees

The Truth in Lending Act requires that lenders disclose the annual percentage rate (APR) and finance charges -- including application fees, late charges, and prepayment penalties -- to help borrowers compare rates and conditions.

If a lender doesn't list these costs on their website or during an initial loan offer, won't disclose them during the application process, or changes the fee structure as you get further into the loan application process, this is a red flag that the loan could be a scam. Reputable lenders follow fair credit procedures and will clearly disclose rates and fees.

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3. The lender isn’t registered in your state

If the lender isn't registered, then that's likely one of many red flags.

Before you fill out a personal loan application, check the lender's website to verify that it's approved to make loans to borrowers in your state. The FTC requires lenders to register in the states in which they conduct business. If the lender doesn't have a list of registered states, you can contact your state's banking or finance department to confirm that it's operating legally. Good lenders will be happy to share information about the locations they’re approved to work.

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4. The lender requires an immediate commitment

High-pressure tactics are designed to get a borrower to act quickly without fully understanding or investigating a loan offer, and they're a telltale sign that the loan could be a scam. If the lender says the loan offer will expire within a day or two of your request or if you're feeling pressured to sign paperwork under a short deadline, it could be because the loan is a scam. Legitimate lenders will give you several days to complete the process.

Here's everything you need to know about personal loans (and the process). Credible can also walk you through it step-by-step — just head to their website to learn more about what to expect.

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5. The lender demands a prepaid credit card

Reputable lenders may charge an application or credit report fee in order to start the loan process, but they’ll request payment with a credit or debit card or another form of personal payment. If the lender requires you to provide them with a prepaid debit card, it’s almost certainly a scam. Prepaid debit cards are virtually untraceable, giving you no recourse once you buy and deliver it. Don’t do business with a lender who demands this form of payment.

If you need a personal loan, take steps to protect your finances. You can check lenders’ reputations with the Better Business Bureau. If you think you've been scammed or if a lender has questionable business practices, file a complaint with the FTC. If a loan offer seems too good to be true, it likely is.

Unfortunately, scammers are more than willing to take advantage of people in need, including during a pandemic. It's up to you to protect yourself by asking questions, doing your research, and only dealing with legitimate businesses.

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