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Loan Scams and Loans to Avoid

Most financial scams are aimed at America’s youngest and oldest adults. Find out how to avoid them.

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Did you know that scam artists and predatory lenders come out of the woodwork during times of crisis?

Whether it’s after a natural disaster, during a recession, or in the midst of a public health crisis like COVID-19, predators see consumer vulnerability as an invitation to act.

In recent years, millions of consumers have lost money to government impersonation scams, after being led to believe they were dealing with a real government agency. In fact, The Federal Trade Commission (FTC) collected the following information from consumers in 2021:

  • 8M fraud reports, totaling $5.8B in losses — up 70% from 2020
  • More than $2.3B in losses to government imposter scams — up from $1.2B in 2020

While a new scam is born nearly every day, most scammers use the same bag of tricks. That means you can easily spot a scam once you know what to look for. Here’s what you need to know.

What Are Loan Scams?

A loan scam is a loan that’s offered under false pretenses. The scammer often hooks their target by making a big promise they can’t deliver on, or by hiding the actual cost of the loan.

Loan scammers even use fake company logos, false caller ID numbers and other tricks to impersonate legitimate agencies and gain trust. In offering you a loan, their goal is to do one or more of the following:

  • Obtain personally identifiable information (PII) or financial information, like your SSN or credit card number
  • Gain permission to access your personal accounts or legal ownership of your property
  • Charge high interest rates and/or hidden fees
  • Charge fees for products or services you won’t actually receive

Loan Scams: Be Aware of These

Loan scams can take many different forms, but they often employ the same tactics. Here are the most common red flags:

Pressure to Act Now

Scammers often pressure their victims to act immediately. By creating a false sense of urgency, a scam artist or predatory lender can get you to overlook red flags. But you should never make financial decisions, offer sensitive information, or sign documents under pressure.

Guaranteed Approval

Most lenders have several requirements that you’ll have to meet in order to qualify, including a minimum credit score, proof of income and more. While there are legitimate loans for people with poor credit, a lender that advertises guaranteed approval is likely offering subprime loans or running an outright scam.

Debt Cancellation

Scammers often promise they can get rid of your debt. In fact, student loan forgiveness scams were rampant during the pandemic, and one scam company defrauded borrowers out of over $1.7M by pretending to be affiliated with the Department of Education.

Private debt settlement companies also take advantage of their customers by collecting payments and then using little or none of the money to pay off the customers’ debt.

Whether it’s student loan debt, mortgage debt relief or otherwise, working with a private company to settle or cancel your debt can have disastrous financial and legal consequences.

Other red flags

Here are some other common scam tactics to look out for:

  • Asking for payment up-front, before you receive services or get a chance to see paperwork.
  • Requesting payment through untraceable methods, like money, a prepaid card or even cryptocurrency.
  • So-called government agencies that call or text you, claiming that you owe money.
  • Loan offers that are made over the phone.
  • Being encouraged to cut off contact with your creditors.

Types of Loans to Avoid

Unfortunately, some of the most costly and predatory loan products are perfectly legal and widely available to consumers.

The following types of loans aren’t technically scams, but they’re high-cost and high-risk. At best, these loans should be considered an absolute last resort:

Payday Loans and Check Advance Loans

Payday loans and cash advance loans are designed to be debt traps — meaning they pull you into an endless cycle of borrowing just to pay off your previous loan — and interest rates for these predatory loans can exceed 400% APR.

401(K) loans

When you take out a 401(k) loan, it may feel like you’re just dipping into your savings, but that couldn’t be further from the truth. In fact, you’re turning your savings into debt. Here are some of the costs to consider:

  • Most borrowers under the age of 59½ have to pay a 10% tax
  • You can be taxed more if you don’t make the full payment
  • You may have to repay the full balance if you lose or leave your job
  • You’ll have less money available when you retire

Title loans

Title loans require you to offer your car or home as collateral. By offering the title to your property, you can potentially secure a loan for which you wouldn’t otherwise qualify.

But if you fail to pay, you could lose your car or home to a lender. In 2016, the Consumer Financial Protection Bureau (CFPB) found that 20% of car title loans ended in vehicle repossession.

Buy-Here-Pay-Here Auto Loans

Some auto dealerships offer in-house lending, meaning they both sell vehicles and provide auto loans. These dealerships often advertise that creditworthiness is no problem, and they appeal to customers based on the convenience of buying and getting a loan all in one spot.

Here are the biggest problems with these lenders:

  • Astronomical fees: These lenders charge extra loan fees and high interest rates, and sometimes hide expensive add-ons in their loan contracts. In addition to creating a financial burden, this can cause you to immediately go deeply underwater on your vehicle.
  • Limited selection of vehicles: Loans are only available for cars on the lot, so you’ll likely pay above market rate for a vehicle and miss out on deals you could find online or at another dealership.
  • High risk of repossession: These dealerships also put buyers at higher risk of repossession, and some even install disabling devices in their cars to stop the vehicles from running if a borrower is late on a payment.

Pawn Shop Loan

Some pawn shops allow you to give them collateral in return for a loan. Usually the payback window is short — between 30 and 90 days — with interest rates and add-on fees that can amount to as much as 120% APR. In addition to costly terms, you risk losing your valuable possessions when you go this route.

What to Do If You’ve Been Scammed

If you’ve been targeted by a scam, it’s important to act quickly. The following steps can help you minimize the damage and potentially recover what you lost:

  1. Contact the companies involved: If you made a payment from your credit card or bank account, contact the creditor or bank immediately to cancel the transaction and initiate any necessary security processes.
  2. File a police report: Contact your local police department for information on how to file a report. Be sure to request a copy of your report since you may need it later as proof of the incident.
  3. Monitor your credit: If your personal or financial information was stolen, a scammer may attempt to use your credit or open accounts in your name. Pull your free credit reports and review them for unauthorized activity. You can also contact one of the three nationwide credit bureaus (Experian, Equifax or TransUnion) to place a fraud alert on your reports.
  4. File a report with the FTC: Filing a fraud report helps the FTC track and investigate scams. You can also get personalized tips for responding once you submit your report.

How to Spot a Legitimate Business

When in doubt, take some time to verify that you’re dealing with a legitimate business. Before entering into an agreement or providing personal information, look for the following evidence that a business is legitimate:

  • Better Business Bureau (BBB) reports or other official ratings
  • Positive online reviews
  • Professional communication, including good grammar
  • A website, phone number and physical location you can verify through your own online search, without clicking on any links you received in an email or text message

Consult With a Financial Professional If You Need Help

If you’ve fallen victim to a scam or a predatory loan, help is available. A Certified Credit Counselor can offer free, professional assistance in recovering from the incident, including guidance on how to read your credit reports and protect your credit scores.

Many people fall for scams because they’re looking for real financial help and debt relief, but a trained counselor can help you find a better solution. Whether or not you’ve fallen for a scam, you can reach out to a nonprofit credit counseling agency for professional help managing debt, improving your finances and more.

About The Author

Sarah Brady

Sarah Brady is a Personal Finance Writer and educator who's been helping people improve their financial wellness since 2013. Sarah writes for Experian, Investopedia and more, and she's been syndicated by Yahoo! News and MSN. She is a workshop facilitator and former consultant for the City of San Francisco's Affordable Home Buyer Programs, as well as a former Certified Housing & Credit Counselor (HUD, NFCC).


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  4. N.A. (2021, February 10) FTC Sends More than $1.7 Million in Refunds to People who Lost Money to Student Loan Debt Relief Scam. Retrieved from
  5. N.A. (2016, May 18) CFPB Finds One-in-Five Auto Title Loan Borrowers Have Vehicle Seized for Failing to Repay Debt. Retrieved from