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

By Matt Mayerle
Modified on June 7, 2023
Personal Loan Frauds and Scams What You Need to Look Out For

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 for many other Bad Credit Loans as well. The details of your life that you provide in the application process are not only appealing to lenders. Thieves can also use anything from your home address to your Social Security number to take money from you. Read on to learn more about personal loan frauds and scams.

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. 

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

What Are Personal Loan Frauds and Scams? 

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

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

Common Personal Loan Frauds and Scams

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. 

Signs Of a Personal Loan Scam 

With thousands of personal loans available to consumers, it is tough for law enforcement to keep up with the evolution of secret loan scams. However, there are some telltale signs of the typical quick cash loan scam that you can easily spot.  

Guaranteed Approval 

Personal loan applications are never guaranteed. So, any company that says you’ll be approved “regardless of” anything should be avoided. 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.

Payment History Isn’t Reviewed. 

For any quality lender, your payment history is the most critical factor in determining approval or denial. 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 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 and interest rates on loans. When a lender fails to list an advance 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. 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 the 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. For example, the 2008 mortgage crisis was a result of massive mortgage fraud centered around subprime lending.   

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: What You Need To Look Out For

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.  

Identity theft is used to gain access to everything from social security numbers to medical care. The most common form is financial identity theft, where someone’s data is used to get credit cards, benefits, or goods.

How Does Identity Theft Work? 

Identity thieves look across the areas of our lives to hunt for helpful information. Their methods can range from listening to your phone calls to tracking bank account numbers in trash cans. 

But the best opportunities for identity thieves lie in the use of technology. These methods include searching the discarded hard drives, hacking into computer networks, and installing malware to infect victims’ computers. Identity thieves are also known to browse social media sites to clone the accounts of their victim’s friends. When posing as someone close to them, they can gain access to birth dates and other pieces of valuable information.

According to the Federal Trade Commission, the number of reported identity theft cases doubled between 2019 and 2020. Additionally, the FTC said a 2,920% increase in identity theft cases where information was used to apply for government benefits and unemployment compensation. This spike is primarily attributed to the increased federal funding for COVID-19 economic relief.  

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. 

How to Protect 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 report with all 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 Report 

Your credit report is a great place to spot signs of fraud. Each of the credit bureaus allows free access to your credit report. So check your credit report often to verify all the accounts listed under you. 

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. For example, let’s say that you visit your bank’s website to view your account. After entering your username and password, you are sent to a page that asks for an access code. At the same time, you receive a text message with the access code you need. After entering that code, you can view and manage your account. This method increases the likelihood that the person looking to access the report is, in fact, you.  

Broadly, be sure that in your online interaction—particularly on social media—that you are careful about the details that you share about your life. Personal information can help thieves figure out passwords and answers to security questions. 

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!  

How Fraud Is Prosecuted

There are anti-fraud laws that govern business at the state and federal levels. Prosecutors in these cases determine if the perpetrator of the fraud will be taken to trial. 

To make a solid case for fraud, the prosecution must prove the following: 

  • That the perpetrator provided a false statement as a fact. 
  • The perpetrator knew that the information was not a fact. 
  • The incorrect information was made to mislead the victim intentionally 
  • The victim’s belief in the false statement 
  • The damage the victim suffered due to their belief in the false statement 

If the prosecution convicts, the perpetrators could be sent to jail. The severity of their sentence typically depends on the amount of money stolen from the victim. 

If the case doesn’t go to criminal court, the victim and the perpetrator could reach a settlement that awards the victim some money. If no settlement can be reached, the victim could sue for the award in civil court. 

In Conclusion

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. So, when you fill out your next loan application, ensure that you understand where your information is going and what it will indeed be used for. 

Also, be sure to consider the actual need to give out your personal information. Is the loan or offer you are applying for a genuine need? Even just taking a day to consider that “exceptional offers” may give you the time you need to make a good decision. 

As we mentioned earlier, even our best efforts to fight fraud don’t always do the trick. For every defense you put up, criminals are working hard to find a new offense. 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 if law enforcement can’t help, contact an attorney to see if there are possibilities for civil action.  

Your personal information should always be treated with care and given with caution. So, take the time to explore all the ways you can safeguard against frauds and scams. Doing this will help you do more than avoid the risks. It will also help you maintain the financial security and stability you need to take advantage of any opportunities that come your way. 

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