How to avoid a personal loan scam

You can get personal loans from a lot of places these days. If you don’t like your bank or credit union’s terms or have bad credit when applying, an online lender might cater to your specific needs.

But going online comes with a downside: It’s harder to tell a scam from a legitimate offer. To help you avoid getting ripped off, we cover the signs of a personal loan scam and what you can do to avoid them.

6 signs of a personal loan scam

1. No credit check required. Most legitimate lenders will check your credit to determine if you’re able to repay them: A high score means you repay your debts in full and on time. If a lender isn’t interested in seeing your credit score, this may be a red flag. A scammer typically doesn’t care about your creditworthiness because they’re simply after your personal information. It’s always best practice to check your credit score on a regular basis. Unexpected credit checks could also be an indicator of potential fraud.
2. You can’t find a physical address. If a lender doesn’t provide a physical address or contact information, this may be a sign that it’s illegitimate. Scammers want to make it difficult for you to get in touch later, thus avoiding any legal action you might want to pursue against them.
3. Your offer expires soon — and you must act now. If you’re faced with an “urgent offer,” you’ve likely found a scam. Legitimate lenders offer steady rates that depend on your credit. Pressure tactics are designed to drive you to act quickly, before you’re able to spot a scam in progress.
4. The loan requires payment up front. Loans demanding “processing,” “insurance” or any fees before approval are a scam. A lender asking for payment before it’s processed your application is a scammer looking for a quick buck.
5. You’re guaranteed approval. There’s no such thing as a guaranteed loan. For approval, a lender will typically check your credit and verify your information. Scammers may lure you in with guaranteed approval to discourage you from shopping around or so they can collect fraudulent upfront fees. It’s not unusual to come across “pre-approved” loans when you agree to a soft search, but a lender will want to carry out a full, “hard” credit search before making a formal loan offer.
6. Asks for payment in the form of a gift card. Paying a lender with a gift card is the same as paying with cash — once the money has been used, it’s nearly impossible to trace or get back. No legitimate lender will ask you pay with a gift card, and if your lender is pressuring you to do so, you should find a new loan.

6 things to look for in a legit lender

Use these tips before signing a contract to be sure you’re dealing with an upstanding business.

• It’s easy to contact. When you call or email a legit lender, you should be met with decent customer support that’s ready to answer your questions. The lender should also clearly display a physical location and its licence information online.
• Its website is secure. Look for a little padlock to the left of your address bar to confirm the site is safe. Most lenders encrypt the information you send to it online with 128-bit or 256-bit SSL. If a lender doesn’t, move on. A great offer isn’t worth risking your personal info.
• It runs a credit check. When you apply for a personal loan, you’ll typically get two credit checks: a soft pull to confirm you exist and a hard pull to see your history. If a lender doesn’t care about this important step in the process, it’s likely not legit.
• Its loan terms are clear. A legit lender will provide a transparent contract outlining how much your loan is for, the fees you’ll pay, any potential penalty fees, your interest rate, the total interest you’ll pay and the final cost of your loan. It will also detail when you pay and your payment options. If your contract is incomplete, don’t sign it.
• Reviews and ratings are available online. See what other people say online about this lender. With your research, ask: Are reviews positive or negative? What problems do customers report? Can you find information on the lender? If you can’t find anything positive — or anything at all — you could be looking at a scam business.
• FCA authorisation A good first check to do is to see whether the lender is authorised by the Financial Conduct Authority (FCA). It has an online public record called the Financial Services Register that shows details of firms, individuals and other bodies that are, or have been, regulated by the FCA. If the lender isn’t in that register, then it’s best to stay away from it.

How to avoid a personal loan scam

Here’s how to protect yourself from two common scams you might encounter when applying for a personal loan.

• Phishing scams

Among the most common personal loan scams are those that involve fraudsters “phishing” for your personal or financial information.

In a typical phishing scam, you visit a site or open a form that appears to be from a legitimate lender. You might even speak by phone with a caller claiming the need to “confirm” your loan details. In either case, if the scam is successful, you’re tricked into providing your National Insurance Number, bank account numbers or passwords, which a scammer then uses to steal your money or identity.

• Advance-fee scams

These simpler scams are sometimes combined with phishing scams. In this case, you apply for a personal loan with a fraudulent lender that asks for you to pay a fee to cover processing costs, insure your loan or even guarantee approval before they’ll process your application.

You’re often asked to pay with a wire transfer or prepaid debit card — payments that aren’t traceable, making for an easier getaway. By then, you’re out money and potentially your identifying personal or financial information.

Quick ways to see what others say about a lender

• Trustpilot. A Danish company, Trustpilot is another consumer-run review site, with some 500,000 new customer reviews published monthly. Combined with the BBB, you can make out a pretty good picture of how a lender runs its business and what you need to know before applying for a loan.
• Online forums. Don’t stop with the big review sites. Plenty of online forums like Reddit allow you to browse customer opinions and crowdsourced answers about lenders and potential scams. Or post your own questions about a lender, and see what customers have to say. If you’re worried that a positive review elsewhere is from a shill, a forum could be a decent alternative for information from people who likely aren’t affiliated with the company.

Bottom line

Scammers put a lot of work into gaining your trust so that you click, share or open what they’re pedalling. Which means that real loans are increasingly hard to tell from the fakes. In the end, knowledge is the best defence against personal loan scams.

Frequently asked questions

• I got a pre-approved loan offer. Is it legit?

  You receive a call, email or letter about a “preapproval notice” – but how can you tell if it’s from a real lender? If the offer is from a known source, like your bank or a well-known lending provider, it could be the real thing. Even so, your best bet is to look up the offer online or call the lender’s customer support.

• A lender asked for my banking information. Is this legit?

  It depends. Many legit lenders request your bank account information to confirm your identity and deposit your loan. But if you suspect that a lender is illegitimate or conducting a scam, go with your gut. Avoid entering your bank account information online, choosing to call them directly instead.

• What do I do if I've fallen for a scam?

  If you suspect that you’re the victim of a money transfer scam:

  • Call the police. File a police report for the amount you’ve been defrauded.
  • Contact the National Fraud Intelligence Bureau. This is a police unit in the UK responsible for gathering and analysing intelligence relating to fraud and financially-motivated cyber crime.

• Should I pay the lender by prepaid card before I get my loan?

  No. You face two red flags: Legitimate lenders don’t collect fees up front and won’t ask for additional money by prepaid card or a money transfer. Any fees you’ll need to pay are typically disclosed clearly, taken from the amount you borrow and paid after your loan is approved.

• What do I do if I'm receiving calls from a lender demanding payment?

  Calls from businesses you don’t recognise are more than likely a scam designed to pressure you into handing over your personal or financial information. If you’re not sure, ask the caller for the full business name and then search for contact information to call them back.