Sara Routhier, Managing Editor and Outreach Director, has professional experience as an educator, SEO specialist, and content marketer. She has over five years of experience in the insurance industry. As a researcher, data nerd, writer, and editor she strives to curate educational, enlightening articles that provide you with the must-know facts and best-kept secrets within the overwhelming world o...

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Joel Ohman is the CEO of a private equity-backed digital media company. He is a CERTIFIED FINANCIAL PLANNER™, author, angel investor, and serial entrepreneur who loves creating new things, whether books or businesses. He has also previously served as the founder and resident CFP® of a national insurance agency, Real Time Health Quotes. He also has an MBA from the University of South Florida. ...

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Reviewed by Joel Ohman
Founder, CFP® Joel Ohman

UPDATED: Dec 17, 2012

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Fraud occurs in just about every facet of finance.

The Federal Trade Commission (FTC) has laws which protect consumers from financial scams, but with an ever-increasing online market, it is impossible to stop all scammers. However, there are ways to avoid a personal loan scam from occurring. Researching lending companies, avoiding advance-fee deals, and thoroughly critiquing lending documents will ensure that a personal loan benefits both parties alike.

Research Company First

One of the first steps to avoid a personal loan scam is researching the lender. Almost all reputable companies have an online presence today. If a company advertises a great interest rate, take a few minutes to visit their website. Check out the listed address and call the telephone number to ensure it is a real company. If the website does not list an address or domestic phone number, it is likely a scam company or a company that will be difficult to communicate with if problems arise.

Furthermore, if the company is not accessible online, then it is advisable to avoid the company. It is better to use a trusted source to find a personal loan lender. Think about it: if the company is vague or confusing, then the lending process will likely be confusing too. A strong online presence, as well as trusted reviews and coverage, helps ensure that the company is legitimate.

Another area of concern is the way companies target new customers. Some lenders, both illegal and legal, pressure borrowers to immediately take advantage of a loan offer. Large lending decisions should not be made out of fear of losing a great deal. They should be thought about and researched. If a company pressures a borrower, the borrower should look elsewhere for a personal loan.

Avoid Advance-fees

Advance-fee personal loans are scams that typically target desperate borrowers. The advertisements can be posted in newspapers, fake lending websites, or via telemarketing. The lender advertises great offers with fake, yet convincing loans documents. The only request made by the lender is for an insurance payment. If the borrower believes the hype, they will wire transfer the insurance deposit to the lender. The scam lender will receive their money, but the borrower will never receive the loan payment that was promised.  Additionally, the borrower will never receive their insurance deposit back.

Wire transfers are the preferred method of scammers because it is nearly impossible to trace the funds.

This scamming method can be prevented easily. Lending companies never request or require funds up front. The whole point of a personal loan is to provide money for the borrower, and not to take it away. All that legitimate lending companies require before approving a loan is financial information such as credit scores and proof of employment. Legitimate companies will never ask for a deposit for a personal loan.  

If an advertisement is posted, either ignore it or report it to the local authorities.

Critique Blank Documents

Blank documents are common in loan fraud. Borrowers should never sign documents that have blank spaces or inaccurate information.

Reputable lending companies have staff members that handle all forms of documentation for new and existing loans. The forms that are used for the lending process have been reviewed and edited and should be free of all errors and blank spaces.

Blank documents can cause issues because changes can be made to a personal loan agreement after the borrower signs the document. In this case, the fake lender will be able to add a different interest rate, change the lending terms, or increase the monthly payment.

The agreement should be reviewed throughout the lending process: during the initial discussion, right before it is signed, and after the loan is approved for any final questions. If edits are made to the agreement, make sure to review the document completely once again. Sometimes scam artists will add in false information after an initial copy has been reviewed.

If the borrower is confused by the lending terminology presented, they should reach out to legal or financial guides to review the document beforehand.