While there are plenty of reputable lenders in the personal loan space, that doesn’t mean it’s scam-free. Like most other areas of personal finance, there are plenty of fraudsters who will use personal loans to extract money from you or perpetrate fraud in some other way.
As you explore the world of personal loans, here are some traps to be aware of:
Advance loan fees
Occasionally, a fraudulent loan company will offer outrageous loans and loan terms with a catch: You have to pay the first few months of payments to qualify.
“They usually ask for these funds via Western Union or Moneygram,” says Detweiler. “But it’s a complete scam.”
No reputable lender would ask you to pay money upfront. “Do not pay money upfront for a personal loan under any circumstances,” she says.
Another one from Detweiler: the fraudulent lender who will offer you a personal loan, only to say you need to buy “insurance” to cover the loan in case you default.
This is also a scam because personal loans are unsecured – and because no reputable lender would require you to buy insurance to insure your own loan.
‘No credit check’ loans
According to the Consumer Financial Protection Bureau (CFPB), a lender who isn’t interested in checking your credit should set off alarms.
Ads that say: “Bad credit? No problem” or “We don’t care about your past” should be particularly worrisome, notes the CFPB. These slogans are usually suggestive of a scam.
Some personal loans might come with the caveat of pre-compute interest, interest that is stacked so you pay the bulk of it near the beginning of your loan term.
This is a bad deal, since you’ll wind up paying extra interest – even if you pay your loan off early. Before you take out a personal loan, make sure you know how interest is accrued and how it will impact the total costs of your loan.
Some personal loans will tack on a prepayment penalty if you pay your loan off early. Since this fee isn’t that common and is totally unnecessary, you should avoid loans that charge this fee altogether.
Make sure you read through your loans terms to check for a prepayment penalty. If you find one, look for another lender and loan.