How to Know if a Loan Offer Is Legitimate So You Can Avoid Getting Scammed

According to the Federal Trade Commission 2024 Consumer Sentinel Network Data Book, in a single year, they received over 350,000 reports of bank and lender scams. These often involve what are called “personal loan scams” –  fraudulent and/or exploitative offers from shady individuals or companies that aim to scam you out of your money, sensitive personal information, or both.  

But many of us still need personal loans, so how can we sort out legitimate offers from frauds? 

What Are Common Types of Illegitimate Loan Offers? 

The easiest way to start is by looking at the types of loan scams or predatory loan practices that you’re most likely to encounter. By identifying them, we can start to better understand the hallmarks and what we should be on the lookout for. 

Loan Scams 

Advance Fee Loans  

Pretty straightforwardly, this is when a company or other scammer promises you a loan of some kind – don't even worry about your credit history! All you have to do is pay them a “small” upfront fee, which they’ll refer to as a processing fee or finder’s fee, a commission, a deposit, or an administration fee. As soon as you do, they disappear with your money. 

Phishing Loans 

Because loan scammers often find targets by purchasing the information of people who have recently applied for loans, you might find yourself receiving fraud calls or emails from people claiming to be from a loan processing team and claiming to need some final information to approve your loan application. The BBB received over 500 reports of scams like these in just three months, and the goal is to get you to turn over information like your SSN or bank account details. 

Fake Lender Websites 

Some scammers will hide themselves underneath the umbrella of a trusted, legitimate lender or financial institution. They’ll copy the logo, set up a fake website and email, and reach out to you with loan offers. But the majority of legitimate lenders won’t be sliding into your inbox out of the blue, and you should look closely at the email addresses and URLs of any that do. When in doubt, it never hurts to call the customer service number of the company to double check that the call or email really did come from them. 

Predatory Loans 

Payday Loans 

If you’ve ever watched daytime cable, you’ve almost certainly seen commercials for payday or cash advance loans. They’re short-term loans that you take out under the agreement that repayment is due in full on your next payday. Payday lenders will boast about doing no credit checks, but they also come with extremely high interest rates since they fall under exemptions that help them avoid state usury laws.  

Title Loans 

Like payday loans, title loans are short-term and usually available without a credit check. However unlike payday loans – which require no collateral – title loans are a type of secured loan that lets you use your vehicle or sometimes even your home as collateral. This allows you to borrow more than you potentially could otherwise, but it also means that, if you can’t repay on time, the lender can repossess your car, your house, or whatever item you put up as collateral. 

Buy-Here-Pay-Here Auto Loans 

Car ownership can be essential in the United States, which is why you have a number of buy-here-pay-here auto dealers that offer in-house loans for the cars they’re selling. Like payday and title loans, they’re offered with almost no interest in your financial or credit history and tend to charge much higher interest rates.  

Pawnshop Loan 

Rather than selling your valuables for cash outright, some pawnshops will hold onto items as collateral and offer you a loan. It’s usually only for a percentage of the item’s worth, and on top of that, they charge finance fees that can greatly increase the amount you need to repay. 

What Are the Warning Signs that a Loan Offer Is a Scam? 

So what are the red flags when it comes to loan offers? What are the warning signs that should put you on alert? 

• Requests for upfront payments – A legitimate lender will never ask you for money before a loan transaction has taken place. Any administration fees should come from the loan proceeds themselves. 

• Guaranteed approval – As generous as it sounds that a company says you’ll be approved for a loan no matter what, that’s generally a bad sign. No legitimate lender can guarantee you a loan without at least a soft credit check first to understand your finances and how you might pay them back.  

• Lacking state registration – FTC law requires all lenders to be registered in any state they operate in. You can double-check any lender’s license by calling the office of the state attorney general or checking the Consumer Access portal of the Nationwide Multistate Licensing System. 

• Lacking a physical address and/or valid customer service number – If they don’t have a location you can slap onto Google Maps and staffed phone line you can call for questions, issues, and complaints, don’t do business with them. 

• Requests for gift cards or cryptocurrency – Same with the upfront payment request, if a lender says they need you to purchase a gift card or prepaid debit card or cryptocurrency for any reason, you should disengage immediately. 

• Lacking communication and transparency – Personal loans are financial transactions that require clarity and mutual trust. If a lender is hiding their fees, pressuring you to borrow more than you need, switching up loan terms with no warning, or not providing copies of signed documents, you should be extremely wary. 

What Steps Can You Take to Protect Yourself and Ensure a Loan Offer Is Legitimate? 

Now that you know what to look out for, let’s talk about what you can do and what steps you need to take in order to make sure any loan offer you accept is a safe and legitimate one. 

1. Take your time and research thoroughly. It’s tempting to rush the process – or even be rushed by predatory lenders who are imposing a false sense of urgency. But you need to take your time and make sure you know exactly who you’re signing a loan offer with. Read through any documentation, and don’t sign anything you haven’t read or don’t understand. 
2. Search the Better Business Bureau. This is an excellent place to start with any company or business. As a nonprofit organization, the BBB is a central resource for company information, customer reviews and complaints, and any alarming issues with a lender’s actions or reputation. 
3. Check online reviews and feedback. For all that the internet gives scammers tools to target victims, it also gives potential victims access to so much more information that can prevent disaster. Search up a lender’s name and read through reviews on Google, posts on Reddit, and other sources of consumer networking and information-sharing. 
4. Don’t return unsolicited calls or emails. This ties directly into those phishing scams we mentioned above. If a company drops in out of the blue to offer you loan rates and terms that seem too good to be true, they probably are. Don’t answer any phone number you don’t know, don’t open any email you’re unsure about, and never ever open attachments or click links from unrecognized email addresses. 
5. Keep that personal information locked up tight and never pay upfront fees. If a lender is pressing on you to give them sensitive info, like your Social Security number, your credit card number, your bank account, your passwords – don't do it. And the minute they start making noise about how they need you to shell out money upfront, it’s time to walk away. 
6. Most importantly, stay critical and questioning. A legitimate lender is going to have no problem with you asking for the information you need to feel comfortable signing the loan paperwork. Scammers thrive when we’re too in a hurry to think critically; don’t give them that advantage.