June 8, 2023


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There Are 4 Ways to Recognize a Personal Loan Scam

If you’re looking to take out a personal loan for reasons like debt consolidation or home improvement projects, it’s important to make sure the lender you’re trying to get money from is legitimate.

Scammers may try to rip you off by asking for money upfront or promising guaranteed loan approval. They may even pose as a legitimate company and offer lower rates or fees than the real lender advertises on its website.

You have many options to protect yourself from getting hurt by personal loan scams, though. Here are four ways to recognize and avoid scams so you can borrow money without worrying.

1. Thoroughly research the lender

Before you think about taking out a loan with any business, the first step is to ensure it’s legitimate. Read reviews on external websites, check out the company’s Better Business Bureau score, and ask friends and family about their experiences with the business. 

If you’re looking for comprehensive lists that compare many lenders, check out our guides on the best online personal loans, best small personal loans, and best personal loans for bad credit. 

“First and foremost, understand the interest rates and fees,” Todd Nelson, senior vice president of strategic partnerships at Lightstream, told Insider. “Many times consumers feel like if the lender didn’t do a good job of explaining rates and fees, they may have been taken advantage of. Homework is always super important, and any reputable lender is going to be very upfront about what their rates and fees are.”

Check that the rate advertised in your offer matches up with the rates advertised on the lender’s website. You may have to fill out some information to see what rate you are prequalified to receive. 

Also, review the fees listed on the offer. Some lenders charge no fees, but others will charge origination fees, late fees, or prepayment penalties, so it’s important that the fees your offer match the one listed on the company’s website. 

2. Don’t pay money upfront for a loan

A classic tactic that many scammers use is offering you a loan with the caveat that you send them money upfront. They may promise to send you funds after receiving that first payment. 

“Steer clear of anything that requires you to send money to the lender before there’s some sort of transaction,” Jim Houston, the managing director of lending and automotive finance at J.D. Power, told Insider. “Reputable lenders won’t say, ‘You send me money now and then I’ll send you money later.’ It doesn’t work that way.” 

Some lenders may charge administrative or origination fees when you accept a loan, but those are typically taken out of the loan proceeds and will only affect the total amount of money you’ll receive.  

3. Question lenders that guarantee approval

Almost all lenders will have some sort of screening process before they can offer you for a loan. Credit score minimums differ by lender, but most lenders take your credit score into account when deciding to approve you for a loan. Many companies will generate a soft credit inquiry to show you personalized rates.

If a lender asks for minimal information and ensures approval no matter your creditworthiness or other financial factors, be wary. Some common information a real lender may ask for includes:

  • Name
  • Reason for applying for a personal loan
  • Contact information including your address, phone number, and email
  • Date of birth
  • Social security number 
  • Employment status
  • Whether you rent or own your home
  • How much you pay for housing each month
  • Individual income
  • Household income 

“Legitimate lenders are going to go through an underwriting process, especially for personal loans, because they are unsecured debt,” Brian Walsh, CFP and senior manager of financial planning at SoFi, told Insider. “The approval decision is going to be based on the lender’s belief that the borrower is actually going to pay it back. They have to look at things like credit score, payment history, and debt-to-income ratio to make an informed decision. Places that wouldn’t do that raise a huge issue for me.”

4. Pay attention to how the lender is reaching out to you

Legitimate lenders do use a variety of methods to encourage you to borrow from them. You may see an online advertisement or receive an email from a lender, but not every company uses each of these methods. So if you get an email from a lender offering a loan, it’s possible a scammer is using a real company name to contact you.

For example, Lightstream will never make an unsolicited call, Nelson said. Reach out to each lender’s customer support number or email and confirm that the method with which you received your offer is legitimate.

Houston said that bogus offers are less common in the personal loan space than with other types of loans, such as auto loans. But scams do still occur, so know how to recognize them so you can avoid giving your personal information a fake company.

Ryan Wangman is a reviews fellow at Personal Finance Insider reporting on mortgages, refinancing, bank accounts, bank reviews, and loans. In his past experience writing about personal finance, he has written about credit scores, financial literacy, and homeownership.