Their convenience, flexible usage, and straightforward terms make them a solid choice for just about anything.
But criminals target potential borrowers with scams to trick them into sending money or personal information that can be used for identity theft. Here are the red flags of personal loan scams and the steps you can take to avoid them.
What Are Personal Loan Scams
Personal loan scams are fraudulent schemes where criminals pretend to be legitimate lenders to steal your money or personal information. They lure borrowers with promises of low rates and fast cash, but then request upfront payments or your personal information to commit fraud
According to the Federal Trade Commission (FTC), consumers reported losing over $12.5 billion to fraud in 2024, a 25% increase over the previous year. Of the top five types of identity theft in 2024, loan fraud was third on the list.
Red Flags of a Personal Loan Scam
While loan scams come in many forms, most share common warning signs that you can learn to identify. Being aware of these red flags can help protect you from falling victim to fraudulent lenders.
The Lender Asks for Money Up Front
Legitimate lenders never ask for money up front in exchange for a personal loan. They also won't ask you to send gift cards or money through digital payment apps, which are difficult to recover once you realize you've been scammed.
While personal loans do involve fees, legitimate lenders only charge them after your loan is processed.
"The most common scams involve lenders who ask for an upfront fee before processing the loan. Generally, scammers low-ball the rates, claim fast approvals, or actively advertise no-credit checks. Once the fee is paid, they simply disappear with your money," explains Austin Rulfs, founder of Zanda Wealth Mortgage Brokers.
The Lender Offers "Guaranteed" Approvals
Some scammers lure borrowers by claiming guaranteed approval with no credit check, often targeting individuals with limited credit history or low credit scores.
This is a major red flag because legitimate lenders always check your finances, pull your credit report, and verify your identity before approving any loan.
"Guaranteed approval is another common scam. Legitimate lenders will do SOMETHING to assess an applicant before issuing credit or a loan, so while a guaranteed loan sounds like a good thing, it should be a warning," says Rulfs.
You Receive Unsolicited Messages or Loan Offers
Unsolicited loan offers via text, robocall, email, or social media are major red flags. Typically, borrowers initiate contact by getting prequalified or submitting applications to lenders.
If you don't know how a lender found you or you're receiving messages about loans you never expressed interest in, it's likely a scam.
Pressure or Urgency to Apply
Scammers use high-pressure tactics to rush you into "applying" without adequate information. They might claim the loan is only available today or that a low interest rate will disappear if you don't act immediately. You may feel pressured to submit an application or sign documents right away.
Legitimate lenders give you ample opportunity to ask questions about their loans. While they may run limited-time offers, they provide enough time and information for you to make an informed decision.
The Lender Has No Physical Address or Contact Information
Legitimate lenders always provide a physical business address and contact information on their website and documents. If you can't find a physical address or contact details, that's a major red flag indicating you're dealing with a scammer.
The Lender Isn't Registered in Your State
Lenders are legally required to register in states where they conduct business and should publish licensing information or provide it upon request. Check the lender's website and your state's attorney general's office. If you can't find the lender's license in your state, you're probably dealing with a scammer.
The Offer Seems Too Good to Be True
Be cautious if you're offered much lower interest rates than expected or approved for significantly more money than you thought possible. Scammers lure victims with incredibly favorable loan terms.
While some legitimate lenders work with borrowers who have bad credit, they reserve the best terms for those with strong credit.
The Lender Website Seems Off
Scammers create fake websites to impersonate legitimate lenders, and these can appear sophisticated. Warning signs include spelling errors, web addresses that don't match the lender's name, or a lack of clear information about the company.
The Lender Has a Poor Online Reputation
Research the lender's reputation on websites like the Consumer Financial Protection Bureau, Better Business Bureau, and Trustpilot to see what others are saying. Search the lender's name in recent news for headlines or scandals. If you find scam reports, consider looking elsewhere for your personal loan.
How to Avoid Personal Loan Scams
Taking proactive steps to protect yourself from loan scams can save you money and prevent identity theft. Here's how to stay safe when searching for a personal loan:
Stop Communicating with Suspicious Lenders
If you encounter any red flags, immediately stop communicating with the lender and look for a personal loan elsewhere. Don't feel obligated to continue conversations with questionable lenders. Consider reporting the scam to the FTC or local law enforcement to help protect other potential victims.
Never Provide Financial Information Outside Official Applications
Don't comply with requests for money or personal information that happen outside of legitimate pre-qualification or loan applications. Remember that lenders never ask for money up front, and you should only provide personal details through official application processes.
When you're ready to shop for a loan, navigate directly to the lender's official website to submit a pre-qualification request or start the application process. You can also call the lender directly or visit their physical office. Avoid communicating solely through text or email, as these can easily be faked.
Never click links or download attachments sent by lenders, even if they appear legitimate. If you're working with a legitimate lender and need to verify a request, contact them through official communication channels listed on their website.
Research the Lender Thoroughly
Check the lender's reputation using third-party consumer review sites and watchdogs like the CFPB. If you know anyone who has worked with the lender, ask about their experience.
Verify that the lender is licensed to operate in your state and that their physical address and contact information are publicly available. "Before moving forward with any loan, check the lender's credentials. Make sure they're registered with relevant authorities, and don't hesitate to look up reviews or ask for references," advises Rulfs.
Carefully Review All Loan Terms and Fees
When you receive a legitimate loan offer, examine the fees to ensure they align with your expectations:
- Interest Rate: This is what you pay above the loan balance. The rate should match what was initially offered. Unusually low interest rates could indicate a scam.
- Loan origination fees: Lenders often charge origination fees for administrative costs, typically a percentage of your loan balance. This fee is deducted when your loan is processed. Be wary of lenders charging excessive origination fees (above 10%) or requesting fees upfront.
- Late fees: Most lenders charge late fees for missed payments, usually ranging from $25 to $50, or 3% to 5% of your monthly payment. Unusually high late fees could indicate a predatory lender.
- Prepayment penalties: While uncommon, some lenders charge penalties for early loan payoff. Check your loan offer for prepayment penalties and understand the cost of paying off your loan early.
What to Do After a Personal Loan Scam
If you think you've been scammed, don't ignore the issue. The longer you wait to address the scam, the worse the damage could become. Acting quickly might help you recover lost funds or protect yourself against identity theft.
1. Report Fraud to the FTC
Report scams and shady lending practices to the FTC at ReportFraud.ftc.gov. If you believe you're a victim of identity theft, where someone uses your identity to commit crimes like opening fraudulent accounts in your name, report it at IdentityTheft.gov.
Having the scam documented can help you fight identity theft and dispute fraud.
2. Report Scams to Local Authorities
Depending on the nature of the scam, report illegal activity to your state's attorney general's office or file a police report. Documenting scams with local authorities can help you prove you were a victim if needed in the future.
3. Try to Recover Your Money
If you sent money via debit or credit card, you have federal protections that could help you recover some or all of your funds. Report the fraudulent transactions to the financial institution you used.
This is less likely to work if you bought gift cards for the scammer or sent money through digital payment apps.
"If you do get scammed, contact your bank and report the incident to authorities immediately. You may also want to file a complaint with the Federal Trade Commission (FTC). The faster you act, the better the chances are of preventing further losses," advises Rulfs.
4. Put a Fraud Alert on Your Credit Reports
Place a fraud alert with all three credit bureaus: Experian, Equifax, and TransUnion. The alert asks creditors to take extra steps to verify your identity whenever someone tries to apply for credit using your name.
5. Freeze Your Credit Reports
Go beyond a fraud alert by freezing your credit reports with all three credit bureaus. This stops creditors from checking your credit report and blocks criminals from opening fraudulent accounts in your name.
When you submit legitimate credit applications, you'll need to unfreeze your report by contacting the credit bureau.
6. Protect Your Personal Information
If you gave the scammer information that can be used for identity theft, such as your name, address, and Social Security number, take steps to secure your information. Visit IdentityTheft.gov to determine your next moves.
7. Monitor Your Bank Accounts
Watch your credit cards and bank account statements for unauthorized transactions or suspicious activity. Immediately report any fraudulent activity to your financial institution.
8. Monitor Your Credit Report
Check all three versions of your credit report for free once a week at AnnualCreditReport.com. Look for credit applications you never submitted, unrecognized accounts, and other inaccurate information. Dispute any inaccuracies you find with the credit bureaus.
Bottom Line
Personal loan scammers want you to act without doing proper research. Knowing the red flags and how to vet potential lenders can help protect you from various scams. If you do fall victim to a personal loan scam, don't delay—responding quickly can help you recover lost funds and protect yourself from identity theft.
