by Aidan Kang, CFA
Senior Writer
UPDATED: July 27, 2021

Loan companies are popping up everywhere, but how do you know which ones to trust? Many people have made the mistake of using a loan company that is not legitimate. This can be problematic because you could find yourself paying sky-high fees and could even get stuck in an endless cycle of debt as you try to pay off what you owe them. The horrifying thing is that even if you’re well-educated and you think that you’re not the type to fall victim to these loan scams, it can still be hard to tell if a loan company is reputable.

If you’re one of those people who don’t know how to tell if a loan company is legitimate or not, then this article is for you. We’ll give you a step-by-step guide that you can follow so that you don’t get scammed by anyone trying to sell loans that are not legitimate.

How does a loan scam work?

Scammers pretend to be from a licensed personal loan company offering loans and loan services. Those who are interested will be asked to provide personal information, such as bank account numbers. They’ll be asked to pay a deposit or advanced fees, but once you’ve sent the money, the scammers will become unreachable.

Types of personal loan scams to avoid

Advance Fee Loan Scams

Scammers target people with bad credit and offer them loans without checking their credit history. They’d ask you to pay an advance fee so that your loan will be released, but you’ll never get the promised loan.

No Credit Check Personal Loan Scams

It’s a red flag when lenders don’t care about your credit score or history because it’s a normal requirement for a loan. Although you can find legitimate lending companies that don’t solely base your qualifications on your credit score, be wary of potential fraud lenders. They’ll ask you to pay something first before you get your funds, which will never happen once you give them your money.

Private Student Loan Forgiveness Scam

It’s highly unlikely that private lenders will forgive your private student loans, so if a company approaches you with an offer to wipe out your student loan debt, it could be a scam. They’ll promise you that you’ll get debt relief immediately, charge you with exorbitant fees for things you can do yourself, ask you for upfront payment, or get your sensitive information such as social security numbers.

Debt Consolidation Scam

Debt consolidation scammers will push you into getting your debt consolidated and charge you high fees or upfront payments even when nothing has been done yet. Legitimate ones have a long history of serving clients and have built their reputation.

Unsolicited Personal Loan Offers

People trying to scam you will send you unsolicited personal loan offers via email or phone call and may even show up at your door. Legitimate ones don’t use such methods.

Time Bomb Offers

It is not uncommon for companies to use “limited time” offers to sway customers to agree on a loan offer. However, you should be cautious if the lender puts too much pressure on you without giving you sufficient time to decide. This could be a sign that what you are being offered is a scam or you’re being lured into a debt trap.

When you encounter a loan company staff who is using this pressuring tactic on you, don’t give in or be tempted. Instead, ask more questions and clarifications. Tell them that you are considering another lender and you need time to decide on their offer. By not acting impulsively or giving in to the pressure, you will also have enough time to read the contract.

How to spot personal loan scams?

You’re probably dealing with a personal loan scam if you notice that the lender:

Doesn’t care about your credit history

If the lender doesn’t care about your credit report and history even a bit, it’s probably trying to scam you. Remember that credit history and credit score are important considerations in most loans. Although you'll find legitimate companies that cater to borrowers with poor credit, lenders assess your credit report anyway.

Has unsecured website

Secured websites protect your information, such as your personal and bank account details. It’s particularly crucial for every financial institution. Check if the website has a lock icon before the URL.

Doesn’t have a physical address

Legitimate lenders should have a physical address. If not, they’re probably trying to avoid legal consequences. However, even with a listed address, make sure that you verify it as some would list a P.O. Box only or a fraudulent address.

Pressures you into signing up immediately

Legitimate lenders aren’t so keen on getting you signed up and approved. Some lenders give a deadline on their offers, but they’re enough for you to make an informed decision. Scammers will use the sense of urgency and probe you to get a loan in just a few days.

Asks for a prepaid credit card

If the lender asks you for a prepaid credit card, saying that it’s necessary for the fees or collateral, it’s a scam. A legitimate lender will deduct any fees from your loan proceeds upon the release of the fund.

Can’t prove registration in your state

The Federal Trade Commission requires lenders to register their business in the state where they operate. If they’re not listed in your state, they’re probably a scam.

Guarantees you’ll get approved

There’s no guarantee that your personal loan application will be approved. So if the lender is giving you 100% assurance that you’ll get approved, think twice. You’re most likely dealing with loan scams.

How to check if a loan company is legitimate?

1. Examine the Company’s Website and Online Presence for Clues

Many scam loan companies often use online ads to lure you in. When you type in “online lenders” on your search engine, you will surely start getting advertisements from online lenders promising no credit checks, as well as fast and easy approval.

Of course, it’s just natural to click on these ads especially if you’ve spent the last couple of hours searching for a company that will lend you money. You will often be directed to the company’s website and from this point, you can start checking for clues whether it is a legitimate company or not.

Here are a few things that you can check on the company’s website:

  • Does the website look professional? Check for spelling errors, the number of pages of the website, and whether it looks well designed. Many scam websites don’t bother to spend money on building proper websites so if the website is just one to two web pages then that should already be a red flag.
  • Check the website’s ABOUT page if there is a company profile. This should give you information on when the company was established and the people behind the company. Reputable lenders will not think twice about putting names and pictures of the founders or high-ranking staff.
  • Check the website’s CONTACT page. Is there a phone number and physical address location listed on the website? An email address should not be the only way to contact the company.
  • Check whether they have a presence on other online platforms like a Facebook page or a LinkedIn page. Do they have a considerable following or are the pages created just recently? These things should also give you an idea of whether the company is an established one.

2. Investigate the WHOIS Database of the Website

If the only thing you have is the website of the company, another way to check their legitimacy is to perform a WHOIS lookup. By entering the domain name (web address) of the website, a WHOIS lookup will be able to provide you with public information available on who registered the website, contact information, when the website was put up, etc. If the company does not have privacy settings, these details could be available to you.

How can this help? If you see for example that the website was just put up very recently, this could mean that the company has not been in business for very long. You can use this information to help you decide whether you can trust the company or not.

You don’t have to pay anything to perform a WHOIS lookup. There are websites like GoDaddy and DomainTools that offer free WHOIS lookup services. Again, some websites pay extra to hide these details in WHOIS lookups so this may not always give you all the detail you are looking for.

3. Look Into their Ratings on Better Business Bureau

The Better Business Bureau or BBB is a non-profit, private organization where you can find information about different businesses. The BBB has accreditation and rating systems that rate the companies’ performance, ethics, and how they resolve customer complaints.

If you are not familiar with a certain company, you can go to the Better Business Bureau website to see whether it has a BBB profile. You can check their BBB rating and other relevant information about the company. If the company does not have a BBB profile or they have a low rating, this could be a sign that the company may not be reliable.

4. Read Online Reviews

If you are not sure about how a loan company operates, then you can read what previous customers are saying about the business. Nowadays, it’s easy to find reviews online about any business. These reviews can be found on the BBB website, Google reviews, and social media platforms.

Reviews are like a window into the soul of the business. These windows will show you whether they’re trustworthy or not. The experience of reading a review is invaluable because it helps bring you closer to knowing what kind of company it really is and if they meet your needs.

5. Inquire Whether the Business is Registered in Your State

One sure way to see whether a business is legitimate is to check whether it is registered or not in the state where you live. Loan companies that are registered with the state have been vetted by your government and will provide you with better peace of mind than those who aren’t. Before taking out any type of loan from an online lender, check with the Secretary of State website of the state where the business is supposed to be registered.

6. Verify the Company’s Address and Physical Location

Sometimes, a company’s website may look very professional but that does not necessarily mean that a business is legitimate. If you want to further verify whether a company is legitimate, what you can do is verify the address listed on the website.

Does the business have a physical location or is the address listed just a P.O. Box number? If there is a physical address listed, you can key this in on Google Maps to see whether they actually have an office in that location. Legitimate businesses will usually have photos on Google Maps that show the actual business location or physical offices.

7. Give them a Phone Call or a Visit

While investigating online can give you a lot of clues on whether a business is shady or legitimate, checking the old-school way can still be beneficial. Take a few minutes to call the phone number indicated on the website during business hours. Is there someone answering the phone? If somebody answers, talk to the person to learn more about the business.

If the business location is near where you are located, you can also try visiting their offices to see whether they are actually located at that address. Many scam companies usually put up temporary offices so you should also be cautious about this. If you are in the office location, check whether it is furnished properly. A sparsely furnished office that looks very generic can be a sign that they are not really based there. Another tip is to ask nearby or neighboring businesses whether the company has been in that location for a long time or if they are just there temporarily.

8. Always Read the Fine Print

Are you one of those people who hates reading terms and conditions? Don’t worry because you’re part of the majority. According to a social experiment, only 1% of people read terms and conditions. The problem with this is that many people then end up signing things that they don’t understand.

This issue also applies to loan companies. Many people who are in dire need of cash fail to read the fine print because they are in a hurry to get the money. If an offer is too good to be true, don’t immediately think that you just hit the jackpot. Make sure to read all the terms and conditions before taking the loan offer.

FAQs on Loan Scams

What to do if you’ve been scammed?

If you think you’ve been scammed, immediately secure your accounts. Reset your passwords and contact your bank/service providers to report and try to block or reverse the fraudulent transactions. Also, report the scam to the Federal Trade Commission.

Do loan companies check your bank account?

Yes, loan companies need to check your bank account statements to assess your financial ability to pay back your loan. However, don't give out sensitive information without verifying if the loan company is legitimate.

Do loan companies ask for money upfront?

No, legitimate personal loan lenders don’t ask for any upfront money. Any fees you have to pay are deducted from the total loan amount upon release of the funds.

Finding Legitimate Personal Loans

Remember, you can never be too careful when it comes to money. You might think that going through all these steps can take a lot of time and effort. However, doing your due diligence from the beginning will not only save you a lot of money but also save you a lot of headaches and frustrations in the long run.