Advance fee loans sounds like a good deal. You pay an upfront fee and get a loan or credit card. But it’s one of the most commonly reported scams. The victims are often cash-strapped consumers or struggling small businesses who can least afford to lose money.
In this article we’ll explain how the scammers operate, the red flags to look out for, and what you can do to protect yourself.
How the Scam Works
Scammers will typically phone or email you, or run ads. In most cases, they’ll create the impression that they can guarantee you a loan or credit card, regardless of your credit history.
Once they’ve sold you on the idea, they’ll ask you to pay an upfront fee to secure the financing. This fee is often referred to as a security deposit or a processing, application, or insurance fee. As soon as you pay the fee you don’t hear from them again.
That’s the basic idea. However, there are many variations of the scam.
For example, some scammers will ask you to wire the “fee” to them while others may request you to buy gift cards. You may even be asked for your banking information so they can make an electronic draft to pay the fee.
If you can’t afford to pay the fee, some scammers will tell you they can add it to the loan amount. Then they’ll create a fake ACH deposit to your bank account and tell you to buy a gift card or prepaid card. The pending ACH deposit never clears and by that time they’ve already depleted the funds in the card card you bought.
Here are some of the most common red flags you need to look out for.
1. No credit check is required.
No legitimate bank or financial institution will issue credit without first checking your credit worthiness, including your credit score. Scammers often target individuals or businesses who are struggling with debt, knowing they have limited financing options.
2. Offers you a loan by phone.
3. The lender isn’t registered in your state.
4. Wants you to pay a “fee” with a wire transfer or gift cards.
Legitimate lenders will never ask you to make a wire transfer or pay them with gift cards. An additional red flag is if you’re asked to wire money to a private individual.
5. The offer seems too good to be true.
If something seems too good to be true, it normally is. A high loan amount or credit limit with a crazy low interest rate is a good indication that something is off.
6. Pressures you to act fast.
When you’re expected to act without delay or lose out, it’s a good sign that you’re dealing with a scammer. A reputable lender will never pressure you to accept a loan or credit card from them.
How to Protect Yourself
- Hang up on any caller who guarantees you a loan if you make an upfront payment.
- Never give sensitive information such as your financial details and Social Security number to strangers, especially not over the phone.
- Don’t be fooled by a flashy, professional-looking website. People are not always who they pretend to be.
- Scammers are often great at forging documents. Contact the lender in question to find out if it’s legit.
- Be wary of companies that hide behind a post office box and don’t reveal their physical address.
- Do your own research. Google the company’s name and add “review” or “scam” after the name. You can also run a search on their phone number or address to see if anything suspicious shows up.
Advance fee loans are a scam. Contact the FTC to report fraud or call 1-877-FTC-HELP (1-877-382-4357).
The Better Business Bureau has resources to help consumers and businesses. You can report a scam (whether you’ve lost money or not), file a complaint against a business, leave a review of a business you’ve used, and report an ad.