7 Ways to Identify & Avoid Advance Fee Loan Scams

In celebration of 2015’s National Consumer Week, a recent report on ABC News outlined the ever-growing problem of advance fee loans scams, where crooks pretend to represent legitimate lenders and contact individuals who have recently applied for a payday loan.

At this point, they’ll inform the potential victim that they’ve been approved for a loan, but that for one reason or another, an advance fee will need to be paid before the money can be deposited (we’ll go into much more detail about this in the next section).

In fact, according to the FBI, advance fee loan scams made up about 2% of all mortgage fraud cases in 2010, the most recent year for which statistics are available. But the reality is that they’ve almost certainly grown in leaps and bounds over the past 5 years and you’re much more likely to fall victim now than ever.

Loan Scam Pie Chart As of 2010, advance fee loan scams made up 2% of the FBI’s total number of mortgage-related fraud cases. Source: FBI

In this article, we’ll outline seven ways to identify and avoid advance fee loan scams, as well as other actionable tips you can immediately put to use.

The Anatomy of an Advance Fee Loan Scam?

Here’s how an advance fee loan scam works:

Imagine that it’s been a difficult few weeks and that you’re going to be short on some important bills. So, in order to make up the difference, you apply for a short-term loan.

1. The Setup Pitch

A couple hours after sending over your application, you receive a phone call from someone claiming to be a company representative. During the call, you’re told that your loan has been approved, but for one reason or another (e.g. bad credit, you need to prove you’re able to repay the loan, insurance/paperwork costs, etc.), you need to pay an upfront fee, which generally ranges between $100 and $500.

Important note: According to Sean Coffey, Communications Manager for the California Reinvestment Coalition, these scams often occur because a consumer believes they’re applying for a loan when they’re actually just handing over their information to a third-party broker. This broker will then sell the information (known as a “lead”) to other lenders, based on the premise that they’ll contact the consumer to provide a loan offer.

The problem is that this information can be resold countless times, eventually making its way into the hands of an unscrupulous company. As such, if you’re going to apply for a payday loan, Sean recommends doing so directly through the lender and not through a lead generator (we’ll talk about how to accomplish this soon). Even then, make sure your connection is secure.

Now, under normal circumstances, you might have some reservations about a situation like this. However, the person on the other end will often have your personal information, including your address and social security number, and will seem fairly legitimate. 

2. The Loan “Fee”

Regardless, you’ll often be asked to place this “fee” on some type of reloadable credit card, such as a Green Dot, a Home Depot or Walmart gift card, or even to send the money directly through MoneyGram. The representative will then promise that once the money is received, your loan will be deposited directly into your bank account within a matter of minutes.

3. The Scam

After you send this money, you’ll wait around for hours, only to find that the money isn’t showing up in your account. You call back the “representative” to find out what’s going on, only to be told that an additional fee needs to be paid due to their mistake.

At this point, you realize that something fishy is going on and decline to send any more money. You ask to speak to a supervisor and are put on hold for more than 30 minutes, after which someone who sounds eerily like the original representative you spoke with comes on the phone.

“I’m sorry, there’s nothing we can do since your original fee was non-refundable. However, if you just pay this last fee, we can get your loan deposited shortly,” they might say.

You hang up, sit on the couch, and think about what just happened. In a matter of hours, you’re left without a loan and with several hundred dollars less in your bank account. If you thought you were in financial trouble before all this happened, you’re in a real pickle now.

In fact, here’s what some HighYa readers are saying about their experiences with advance fee loan scams from fraudsters claiming to represent CashAdvance.com and LendUp:

“I applied for a loan and they said I was approved for a certain amount but due to my low credit score. They said I would need to prove I was able to pay the loan back. They asked if I could go to Home Depot and get a card payer card and put $500 onto it. Of course the sucker and trusting person I was... I did it. Within seconds of me putting that money on the card they emptied it out. Then they had audacity to ask for $402 more dollars to release the funds. They waited until after the banks were closed and took money from my accounts and they have all of my personal details! This company is crooked and thieves. I have reported them and hope they will shut down before they can harm anyone else! Disgusting human beings... How dare they!”

“Terrible Customer Service. Specifically, Tony is awful to deal with. Don't try and ask any questions they don't like it when you do. They ask for your bank account and routing number but yet want you to go to Walmart and purchase a card for a certain insurance amount and then put money on that card. However, the card has to be left in their name. It makes no sense what so ever. Don't provide any account information to them, it's useless. None speak fluent English so it's quite hard to understand when dealing with your money. Jason is the "Account specialist" and did jack crap.”

“ [They] contacted my husband and said they would lend him $1400. All he had to do was go to Wal-Mart, buy a Money Gram for $400, and put it in their name. All of these transactions were of dire urgency! They then called him to get the Money Gram information along with his personal banking information. Now they have disappeared off the face of the earth. No one answers at the only phone number he has and after they got the $400 they haven't called him.”

Counterfeit Checks: Another Popular Payday Loan Scam

Recently, the HighYa team has watched as an increasing number of readers have written about scammers who, posing as legitimate company representatives:

  1. Request to deposit the entire loan amount into the customer’s bank account.
  2. Then, to “validate the account,” they’ll instruct the customer to immediately send the money back.

The problem is that there won’t be enough money in the scammer’s account to cover the deposit—and the bank likely won’t catch the insufficient funds for several hours (even up to a few days), by which time you’ve probably already returned the funds.

In the end, your bank will eventually decline the scammer’s deposit, while approving your transfer, potentially leaving you out a whole lot of dough.

Here’re two more HighYa readers sharing their experience:

“I received a call from this company telling me that I was approved for a loan. I gave them all of my personal information to my bank account to have the money deposited. They told me that they had to deposit a check in the amount of $998 in my account first and I would have to send them the money back to prove my account was legit. I did this and come to find out what they do is deposit bad checks into your account for them to be cleared. Bottom line I had to have my account shut down for fraud. I never received any money. Don't use this company.”

“I went through their process to get a loan. They offered me $3,000. They said I had to build my credit, that they were goning to send me some money and for me to send it back. I did what they said. I really needed the money with just having a baby, having been off work for three months due to the pregnancy, I was pretty desperate. They did all this over a four day period. My bank account in now overdrawn by $9,000... The bank won't help because I consented to do this.”

But what can you do to avoid these types of scams? First things first – you need to know what makes you susceptible to fall victim.

What Makes You a Target for an Advance Fee Loan Scam?

If you’re applying for some type of short-term, high-interest payday loan, you likely fit the ideal profile of an advance fee loan scam victim. Why?

Because these criminals understand that you may already be in debt with poor credit. As a result, you might not be unable to obtain a small loan through a traditional lender. These crooks also understand that you might be behind on your bills and are desperate for a solution, even if it’s only temporary. And it’s this desperation, based on hardship and stress, which they’ll use to their advantage.

Can Payday Loans Help You Build Your Credit?

The fact of the matter is that while many payday lenders are legitimate businesses, they often use many of the same psychological factors as scammers to lead people into making poor decisions.

As such, even if you do go through a real payday lender—not a crook pretending to be one—keep in mind that you’ll often pay exorbitantly high-interest rates, and may end up paying back double (or more) your original loan amount. 

Because of this arguably unfair business model, payday loans can quickly spiral out of control and your once small loan can balloon into something unmanageable, ultimately leaving you in a much worse position than when you started. Given this, while some payday lenders claim they can help you build your credit (since they often target those with poor-to-bad scores), it’s often the case that their steep fees and unreal APRs can leave you in a worse position than when you started.

As an example, here’s what one HighYa reader wrote about Rise Credit, a legitimate payday lender:

“This loan should be used for dire emergencies only and for a very short term period. I would definitely not recommend this loan to my worst enemy, and certainly not to a friend. On a $3,500.00 loan, I paid $272 every 2 weeks-with less than $30 going towards the principle. After 10 weeks, I owed $3,700 (with only 1 missed payment) which is more than I borrowed. So far, in 10 weeks, I have paid approximately $2,000 to use their money. I'm paying off the loan today but ultimately will be paying back over $5000 on a $3,500 loan. I guess I should consider myself lucky that I can pay back after 10 weeks. Never again!”

Instead of going through a payday lender, Investopedia recommends, “If you need money and you find that collateral and credit aren't major problems, a conventional loan is the best-case scenario. If taking out a personal loan isn't a realistic possibility, asking your employer for a pay advance or going to online lending communities like Prosper.com can be a way of avoiding a payday loan. Despite the old adage that warns against borrowing from friends and family, you might want to consider it over resorting to taking out a payday loan - especially considering the payback options put you in a deeper hole.”

Google Bans Payday Loan Advertisements

In fact, “because they often lead to unaffordable repayment terms and financial harm to consumers”—many of which we discussed above—Google banned all ads for payday loans in May 2016. You can still find plenty of these advertisements on Bing and Yahoo’s search engines, though. 

This is despite the fact that Google’s venture capital arm backs LendUp, a popular payday loan provider. Clearly, concerns about payday lending practices run all the way from the average consumer to one of the largest companies in the world.

Now, with all of that said, let’s really dig in and learn about some quick and easy tips you can immediately use to avoid falling victim to advance fee loan scams.

Seven Ways to Identify & Avoid Advance Fee Loan Scams

1. Think Twice About Payday Loan Lead Generators

According to the Consumer Financial Protection Bureau, you should be cautious about using a payday loan lead generation website. Why? While they might make it sound like they’re making your life easier, you’re handing your sensitive personal information to an unknown company and giving them permission to do essentially whatever they’d like with it.  

For an example of just how quickly your information spreads, be sure to read Pam Fessler’s I Applied For an Online Payday Loan. Here’s What Happened Next article on NPR. 

The problem is that lead generation sites might not exactly be upfront about their identity, so any disclaimers might be difficult to find. The CFPB recommends:

“… look for phrases like: “matching you with lenders,” “connecting you with a network of participating lenders,” or something similar, as an indication that you are on a lead generator’s site.”

The FTC also provides several tips you can use to identify if you’re being set up for an advance fee loan scam:

2. Loan Offers via Phone

Here’s the short and skinny of it: “It is illegal for companies doing business by phone in the U.S. to promise you a loan or credit card.” Period.

In other words, if you receive a phone call from someone offering a loan over the phone, this act alone is illegal. As such, be sure to note the number you’re being called from, hang up, and report the fraud to the Financial Fraud Enforcement Task Force, the Federal Trade Commission, and your state’s attorney general.

For more details, please see our What to Do if You’ve Been Scammed article.

3. You’re Asked to Pay a Fee

If you’re still on the phone (remember, you should have hung up by now!), you’ll probably be asked to pay for some kind of fee related to “insurance,” “processing,” or just “paperwork.”

While legitimate lenders will often require you to pay a fee of some sort, they “disclose their fees clearly and prominently; they take their fees from the amount you borrow; and the fees usually are paid to the lender or broker after the loan is approved.”

On the other hand, scammers will demand that your fee be paid before the money is transferred into your account, often through prepaid credit cards, gift cards, or through wiring services such as MoneyGram. If this occurs, this should be your “cue to walk away.”

Related: How to Identify and Avoid Common Phone Scams

4. There Is No Credit Check

Any legitimate lender will need to run your credit, which is the primary method of determining how likely you are to default on your loan (known as creditworthiness).

So if someone tells you that they can provide you a loan without a credit check beforehand, your alarm bells should ring loud and clear. Be sure you’re listening to their warning.

5. Check Their License

This is your money, so you need to guard your bank account closely, almost like a police officer.

In order to accomplish this, if you’re still unsure whether or not you’re dealing with a legitimate lender, get their name, phone number, and physical address (no PO boxes!). If the person on the other end of the line won’t provide this, you can check online for their website, including through the Better Business Bureau.

In addition, you can “call your state Attorney General’s office or your state’s Department of Banking or Financial Regulation.” However, keep in mind that “Checking registration does not guarantee that you will be happy with a lender, but it helps weed out the crooks.”

6. Get It in Writing

According to the BBB, if someone asks you to send money before receiving a loan, ask for all the details in writing. Often times, they’ll balk and come up with some excuse as to why this can’t be done. In fact, these crooks will generally begin applying some high-pressure sales tactics at this point (if they haven’t already).

Speaking of which, if you receive any written communication from scammers that contains “typos and grammatical errors,” this is often a good indication that something fraudulent is afoot.

7. Don’t Be Afraid to Ask for Help

Despite what we might tell ourselves, the reality is that in today’s world, it’s extremely easy to get into debt but extremely hard to get out. In fact, if you’re deep in debt, it can seem almost insurmountable.

As such, Fraud.org recommends enlisting the help of a Consumer Credit Counseling Service (CCCS), who “can provide advice about how to build a good credit record. The CCCS may also be able to make payment plans with your creditors if you’ve fallen behind. These services are offered for free or at a very low cost. To find the nearest CCCS office, call toll-free, 800-388-2227, or go to www.nfcc.org.”

If you’re not yet ready to reach out to a stranger though, you can contact each of your creditors individually and attempt to negotiate a settlement in order to (at least somewhat) relieve your overall debt burden.

In either instance though, keep in mind that unlike what advance fee loan scammers claim to offer, digging yourself out of debt and rebuilding your credit can take years and a lot of effort on your part. But remember, anything worthwhile takes hard work.

Do you have an experience with an advance fee loan scam? Help others by leaving a comment below.

Derek Lakin

With more than a decade of experience as a copywriter, Derek takes a detail-oriented, step-by-step approach to help you shop smarter. Whether it’s nutritional supplements or new scams, he believes an informed consumer is a happy customer.

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