Personal loan frauds and scams what you need to look out for

Personal Loan Frauds and Scams What You Need to Look Out For

Some signs of personal loan fraud include guaranteed approval, hidden upfront fees, the involvement of prepaid cards, the lender not being registered in your state, and pressure to make a decision. 

When it comes to applying for a personal loan, the possibility of loan fraud is an unfortunate part of the process. The same rule applies to many other bad credit loans as well. 

This blog will identify some of the different types of personal loan scams that everyone needs to look out for. With this information, you will be able to spot the warning signs of loan fraud along your path to financial security. 

What Is Personal Loan Fraud? 

Loan fraud is the 2nd most costly white-collar crime in the United States (tax evasion is the most expensive). According to the (FBI), fraud costs us more than $40 billion a year.

That number represents millions of people who have fallen for money scams. And for many of the common victims of fraud, that is money that they can’t afford to lose. For example, the cost of insurance fraud alone breaks down to $400 to $700 for every average American household.2  

Before we can detail what to look out for when applying for personal installment loans, it is essential to establish what exactly we are talking about. What is fraud specifically loan fraud? 

Fraud is an act that intentionally deceives a person in order to steal from them. Fraud means using false claims that would lead to a person providing something they wouldn’t have given if they knew the truth. That false claim usually involves lying or withholding information. 

To work well, frauds and scams rely on consumer naivety. Usually, the person or company committing the fraud knows something that the victim doesn’t know. Loan fraud, as you may have guessed, has to do with credit accounts. The victims are the people looking to borrow money.

Let’s take a look at some common types of loan fraud. 

Common Types of Personal Loan Fraud

When it comes to personal loans, fraud happens almost regularly. Criminals can prey heavily on potential borrowers who are looking for financial relief. Since they are desperate for quick help, they may easily believe false information. 

How to Spot Personal Loan Scams 

With thousands of personal loans available to consumers, it is tough for law enforcement to keep up with the evolution of personal loan scams. 

However, there are some telltale signs of the typical personal loan scam:  

Warning SignDescription
Guaranteed ApprovalAvoid companies promising guaranteed approval; it’s not possible. Legitimate institutions evaluate applications based on credit scores.
No Payment History ReviewReputable lenders prioritize payment history over credit scores. Beware of lenders who don’t review payment history, as they may aim to profit from fees and penalties.
Prepaid Credit Card DemandScam lenders may ask for prepaid debit cards, claiming it’s for fees. Legitimate lenders cover fees from the loan amount and don’t request upfront payments.
Hidden Advance FeesThe absence of disclosed fees is a red flag. Beware of lenders trying to change fee structures or requesting upfront payment using terms like “processing” or “insurance.”
Unregistered LenderVerify lenders’ state registration on their website. Lack of a physical address may indicate fraud to avoid legal consequences.
Pressure for Quick DecisionAvoid lenders using high-pressure tactics to rush your decision. Reputable lenders provide time to consider loan offers without pressure.

Below is more information on each warning sign:

Guaranteed Loan Approval Usually Means a Personal Loan Scam

Personal loan applications are never guaranteed. So, any company that says you’ll have guaranteed approval should be avoided, as legitimate lenders will not allow for that. There are bad credit personal loans available for people with low credit scores. But, denial and approval for bad credit loans are still based on the same factors as any other personal loan.

When Payment History Isn’t Reviewed It’s Usually Loan Fraud

For any quality lender, your payment history is the most critical factor in determining approval or denial. A decent payment history will outweigh a poor credit score. A lender wants to know that they will get their money back from you. After all, the interest on their loan to you is profit for them. 

So why would a lender want a borrower with bad payment history? So that they can rack up fees and penalties that will keep them in debt for months or years. And ultimately, the borrower will end up paying back much more than the principal and interest.  

A Prepaid Credit Card is Required  

Some personal loan scams require borrowers to provide prepaid debit cards for their loans. They claim that it’s for insurance, collateral, or fees. There are legitimate lenders/financial institutions that charge fees to cover the costs associated with your loan application. But those fees—typically known as origination fees—come out of the loan amount. That means that you only pay them IF your application is approved. Good leaders don’t ask for money upfront.  

Hidden or Surprise Advance Fee: Loan Red Flag

Thanks to the Truth in Lending Act, borrowers are guaranteed the right to know everything about the finance charges/processing charges, and interest rates on loans. When a lender fails to list an advance fee/upfront fee, this is a red flag that could be signaling a loan scam. 

Bad lenders will also attempt to change the fee structure to get further into the loan application process. According to the Federal Trade Commission (FTC), a borrower should walk away from any company that insists on up-front payment. And mainly if they use phrases such as “processing,” “insurance,” or “paperwork.”

Lender Isn’t Registered in Your State

The FTC requires lenders to register in the states in which they work with customers. So when you’re looking to 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. If the company’s website doesn’t have a physical address, this is a clear indicator that you should stay away, as they are likely loan scammers. Unfortunately, many fraudulent lenders will do this to avoid legal consequences.

The Lender Demands an Immediate Decision 

Borrowers are sometimes met with high-pressure tactics. They are designed to get borrowers to act quickly without fully understanding or investigating a lender’s loan offer. If you are being forced to make a quick decision on a loan, you are probably very close to becoming a victim of a personal loan scam. 

A quality lender will give you several days to decide on a loan offer. No matter what your financial need is, never feel pressured to make a quick decision. You’ve got the time to make the right decision for you, always.  

Mortgage Loans/Frauds

Mortgage fraud is a misrepresentation made by the applicant, seller, or lender, leading to approval on a mortgage loan they would not have ordinarily qualified for. 

There are three significant categories of mortgage fraud—fraud for housing, fraud for profit, and fraud for criminal enterprise.  

Fraud For Housing/Property 

Fraud for housing usually involves a borrower misrepresenting themselves to buy or maintain a home. Typical actions include knowingly listing incorrect information about income and assets. In some cases, people also work with an appraiser to change the estimated value of a property.  

Fraud For Profit

In this type of mortgage fraud, many different parties within the mortgage industry can be involved. Brokers, appraisers, bank officers, and even attorneys work together to steal equity and money from homeowners and lenders. Fraud for profit can wreak havoc on the mortgage industry.   

Because the criminals’ expertise can cause significant financial damage, fraud for profit is a top priority for federal prosecutors.  

Fraud For Criminal Enterprise 

This type of mortgage fraud occurs when a real estate transaction is used to conceal the source of illegal funds. This criminal act is also known as money laundering. House flipping—buying property to sell it quickly—is a common way criminals launder money with property. 

Mortgage fraud is a severe offense that can lead to prosecution and jail time for offenders. Under federal and state laws, convicted perpetrators can face up to 30 years in prison and pay fines of up to $1 million. 

Types of Mortgage Fraud 

In addition to the examples above, here are some more examples of loan scams and fraud in the mortgage industry: 

Straw Buyers 

Straw buying is the act of lending your name to someone else to purchase a home or car. They are used to disguise the actual buyer and provide a false persona for the transaction. This is sometimes done when the genuine buyer cannot get financing for the purchase.

Short Sale Fraud 

The perpetrator in a short sale fraud hides contingent transactions and falsifies material information, including the property’s actual value, to make an informed decision difficult for the buyer. 

Reverse Mortgage Fraud 

A reverse mortgage is a loan on a property that allows people to turn home equity into revenue. Scams involving reverse mortgages usually involve exploiting the vulnerability of the reverse mortgage users—senior citizens. The perpetrator manipulates the senior into obtaining a reverse mortgage and then pockets the proceeds.

Foreclosure Rescue Scheme 

A “foreclosure specialist” promises to help a borrower avoid losing their home through foreclosure. The borrower pays the crook money to help them fight the process, but they ultimately “lose” the battle. The specialist did nothing but pocket the cash.  

Reverse Occupancy Fraud

Reverse occupancy fraud is a scam where the borrower purchases an investment property and lists rent as their income to qualify for the mortgage. Then, instead of renting, the borrower occupies the premises as their primary residence.

Investment Club Scams 

Ponzi schemes, or investment clubs, involve the sale of properties at artificially inflated prices. Promised high returns with low risks, these schemes are pitched to naïve real estate investors.  

Identity Theft

Identity theft (or identity fraud) is when someone’s personal information is stolen by another party to commit fraud. Often, this fraud involves the victim’s data being used for financial gain or deliberately damaging their financial reputation.  

Synthetic Identity Theft 

Over the past few years, a new form of identity theft has been on the rise—synthetic identity theft. 

Also known as a ‘Frankenstein’ identity, synthetic identity theft is a type of fraud in which a criminal combines stolen personal information with fake information to create a new identity. The accurate information used in this fraud is usually stolen from elsewhere. But because the stolen personal data is legitimate, it can be paired with fake details and passed off as valid. 

Synthetic identity thieves may start by stealing a social security number from one person. Then they make up a name and date of birth to go with the number. Finally, to create an even more believable “person,” these identities are sometimes given social media accounts with pictures. 

Then the identities are used to apply for credit cards and bank loans. This activity will generate a credit report and actual credit score. With a seemingly verified ID and credit history, this fake person has the spending power of any actual consumer. And that means access to high-limit credit cards and unsecured loans. Once the credit runs out or the loan money is withdrawn, the account is left dormant and goes delinquent—with no natural person left to repay the lenders. 

This makes this loan scam tough to spot and even harder to catch in the act. 

An excellent synthetic identity thief creates several fake identities and builds up their credit profiles over time. Although it’s a scam that takes a while to pull off, it is a profitable one. In a 2019 report, the Federal Reserve estimated that lenders lost about 6 billion dollars to synthetic identity scams.4 

How to Protect Yourself From Identity Theft 

Identity thieves get better at their work every day, which makes identity theft tough to eliminate. However, there are some things that you can do to make it more challenging to get to your personal information. 

Freeze Your Credit 

You can restrict access to your credit reports with each one of the three major credit bureaus (Experian, Equifax, and TransUnion). When you freeze your credit, no lender or creditor can access your records. That means that no new loans or credit cards can be authorized in your name. All of the major credit bureaus allow you to freeze and unfreeze your credit at no charge.  

Monitor Your Credit Reports 

Your credit reports are a great place to spot signs of fraud. Each of the credit bureaus allows free access to your respective report. 

Protect your Social Security number 

Your Social Security number is possibly the most important identification number that you have. Think of it as the master password to all of your critical information. You rarely need to carry your social security card with you, so keep it in a safe place. Also, be sure to secure or destroy any documents with your social security number on them. 

Step Up Your Password and Authentication Game 

Although it’s convenient, using the same password for multiple accounts makes a cybercriminal’s job very easy. Instead, use a password manager to create complex passwords for your online accounts. These pieces of software can work with your web browser to log you in and out of websites safely.   

Also, consider using two-step authentication on any of your apps or online accounts that offer it. Two-step authentication is a security feature that forces a user to authorize access from two different access points. 

Get a Shredder 

Documents containing bank account numbers, social security numbers, or other bits of personal data precisely define what identity thieves are looking for. And many times, people make it easy for them by just throwing them out. Instead, invest in a shredder so that you can eliminate the possibility of any hard copies of your data getting into the wrong hands. 

Also, shredding things is just fun!  

FAQS With CreditNinja: How to Spot Personal Loan Scams

I’ve been offered a personal loan with an unusually low interest rate. Should I be concerned?

While low-interest rates can be appealing, it’s essential to ensure you’re dealing with a reputable lender. Extremely low rates can be a red flag for personal loan scams. Always compare offers from multiple personal loan lenders and be cautious of rates that seem too good to be true.

What should I do if I suspect I’ve fallen victim to a loan scam or fraudulent loans?

Act immediately. Cease all communication with the suspected scammer, and report the incident to the police. File a police report and place a fraud alert on your credit reports. Monitor your bank account for any unauthorized transactions and inform your credit card company and other companies involved.

Are payday loans more susceptible to loan scams than traditional personal loans?

These loans can sometimes come with higher risks due to their short-term nature and high interest rates. However, scams can occur in any lending setting. It’s crucial to have financial literacy and verify the legitimacy of any payday loan or debt consolidation company you engage with.

How can I protect my credit history and bank account from personal loan scams?

Regularly check your credit reports for any suspicious activity. Be cautious when sharing personal information, especially bank account details. If you suspect any fraudulent activity, contact your bank and credit card company immediately.

What are the signs of an advance fee loan scam?

This scam typically involves a lender promising loan approval in exchange for an upfront fee. Once the fee is paid, the scammer disappears, and the loan is never provided. Always be wary of lenders asking for fees before processing your loan application.

Conclusion With CreditNinja: Common Personal Loan Scams and Protecting Yourself

Loan fraud, despite any of our best efforts, isn’t going to go away anytime soon. So, the trick in avoiding frauds and scams is to be vigilant. Understanding where your information is going at all times is one of the most important defenses in the fight against fraud. 

If you do find yourself the victim of fraud, take action immediately. Close public access to your account right away and freeze your credit. Also, contact your local law enforcement agency to see what steps you can take to investigate the crime and consider whether you want to file a police report. And if law enforcement can’t help, contact an attorney to see if there are possibilities for civil action. To learn more about personal loan scams and protecting yourself, check out CreditNinja’s blogs.


  1. Insurance Fraud | FBI
  2. Insurance Fraud | NAIC
  3. Identity Theft | Federal Trade Commission
  4. Synthetic Identity Fraud in the U.S. Payment System A Review of Causes and Contributing Factors | Fed Payments Improvements

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