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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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When the nation went into quarantine in March 2020 — and pretty much stayed there the next 10 months — one business never did shut down: Scam artists and fraudsters.

While we were hunkered down, with only our smartphones, laptops, and streaming devices tethering us to the outside world teetering on the apocalypse (OK, some of us watched too much cable news), predators had us right where they wanted us.

And the business of doing bad was oh, so good.

For 2020, the Federal Trade Commission reports harrowing spikes in rip-offs over 2019:

  • Nearly 2.2 million reports of fraud, up 27% from 1.72 million, with identity theft scams remaining the bad guys’ preferred scheme.
  • Losses rising a staggering 83%, to $3.3 billion from $1.8 billion.
  • Thirty-four percent of consumers who filed a report with the FTC conceded losing money, up from 23%.
  • Identity theft reports more than doubled, to 1.39 million from slightly more than 650,000 a year earlier.
  • Driving identity thieves: the lure of CARES Act billions. More than 406,000 people (soaring from 23,213 in 2019) reported their personal information was misused to apply for a government document or benefit, such as unemployment insurance.

Plainly, financial scammers never have been more prevalent, or enjoyed greater success. Often, these ne’er-do-wells prey on vulnerable individuals and many of those happen to be folks who previously have been denied a loan.

These scams definitely are loans to avoid, so consumers must recognize the signs and how to identify them —  while still knowing how to spot a legitimate loan company.

How Widespread Are Financial Scams?

About one-in-three adults is a target of financial scammers, who don’t — despite popular opinion — discriminate by age. Americans are soft touches across generations: Millennials are as readily duped as Baby Boomers and Gen Xers. Only the strategies vary.

The FTC reports Millennials are more likely to be tripped up by internet shopping fraud, business imposter scams, government imposter scams, fake checks, investment schemes, work-at-home scams, and unworthy debt management agencies.

By contrast, Millennials are less likely than those 40-plus to be duped by tech-support and romance scams.

How schemes begin also is important. Millennials report losing money to telephone scammers at a lower rate than those 40-plus. But they are 77% more likely than their older counterparts to succumb to schemes that arrive via email.

A study conducted by the University of Pennsylvania’s Wharton School of Business said that college seniors are easy targets. Using the Health and Retirement Study, a nationally representative survey of Americans 50-and-over, Wharton researchers found that nearly 33% of 1,260 respondents indicated they had been exposed to financial scams during the past five years, while one-third said that outsiders had used (or attempted to use) their accounts without permission.

Don’t beat yourself up too badly. The world is racing ahead, leaving buggy-whip economics behind.

Some advancements ride a tsunami of technology: online banking and brokerage accounts, for instance. Deposit a check without ever visiting a bank … or even budging from the couch. Move thousands of dollars from institution to institution or invest in bitcoin with the click of a mouse.

Some of it is simply consumer driven: payday lenders, borrowing from your 401(k), Exchange-Traded Funds (ETFs), variable rate and adjustable mortgages, reverse mortgages … and, it seems, every twist brings a fresh financial scam designed to dupe consumers.

The potential of online loan scams has only accelerated the problems.

“Scams are ever-changing,’’ said Katherine Hutt, spokesperson for the Council of Better Business Bureaus. “We want to help people recognize them and be prepared the next time they get a suspicious call, email, text or solicitation.’’

When it comes to loans, it’s just as important to know which ones to avoid as finding the best remedy for your financial situation. You should recognize the perils of high interest rates, short repayment times, and ruinous consequences for defaulting. Payday loan fraud is a particularly difficult issue. Payday loans (which can pack punishing interest rates — from 304%-664% APR) are well-known for creating debt-spiral problems for consumers, but there are plenty of others to consider.

Types of Loans to Avoid

Here are some loans that are financial traps:

Car Title Loan — By using your car title as collateral, you can receive a loan amount worth up to 50% of the car’s value. But the interest rate on a car title loan is usually 25% per month (or at least 300% APR) and must be paid back in 30 days. On a $500 loan, that means you must repay $625 (plus any fees) in 30 days or your car gets repossessed.

On some occasions, the loan might be rolled over into another month — meaning an even larger cash outlay – somewhere close to $800 – to pay off interest and fees.

Because these loans are especially popular among military members, the Military Lending Act of 2006 protects service members and their families against predatory lending.

The law caps interest rates at 36% on loans with a term of 181 days or less to repay. It also requires lenders to alert service members of their rights and prohibits lenders from requiring borrowers to submit to arbitration in a dispute.

Two reasons to bypass this loan: a) You might lose your car; b) Washington enacted a law that limited this loan. As members of law enforcement would say, “There’s your clue.”

Cash Advance Loan — Let’s say a business will not accept your credit card, but you absolutely need its product or service. You can pay an extra 3%-5% on the amount withdrawn — plus interest to your bank — and receive a cash advance. The interest charges begin the moment you withdraw the money from a bank (in a process similar to using an ATM). Cash advances can be used in dire emergencies — maybe a mechanic operates on a cash-only basis — but they generally should be avoided.

Overdraft Protection Loan — Most banks offer overdraft protection on checking accounts. That allows you to draw money from the bank even if your account balance is zero. The average bank fee for overdraft protection is $30-$35 each time it occurs. Let’s think about this: If you are out of money already, how are you helping your future self by adding a $30 service fee?

Private Student Loan — The majority of student loans are made through the federal government, but private student loans are available from banks, credit unions, and other lending institutions. Many private student loans carry variable interest rates that are higher than the fixed rates offered by federal loans. Private student loans require a credit check, but don’t offer the flexible repayment options of a federal loan. Private student loans are a worse option in every way than government loans. Choose one only as a last resort.

Pawn Shop Loan — When you need money fast, you could take something of value — jewelry or a computer, for instance — to use as collateral for a pawn shop loan.

The pawn shop will lend an amount equal to a percentage of the item’s value. Payback windows are short — usually between 30 and 90 days — to pay it back with (oftentimes breathtaking) interest.

Most states have statutes limiting pawnbroker interest rates, although they can range as high as 120% APR. There are additional problems with add-on fees for service, storage and a lost ticket. Add-on fees can be more than what you paid in interest charges.

Regardless of any loan, consumers should read the entire agreement, especially the fine print. You must understand the costs, how long you have to repay, and the penalties if you default. Never sign off on a pawn shop loan until you understand all the terms and conditions.

Loan Scams: Be Aware of These

When you need money and have a poor credit score, it’s easy to accept almost any offer for a personal loan. But there are scam artists waiting to take advantage your desperation. They might be offered personal loans through online website advertisements. They could mail a flyer that guarantees a loan, regardless of your circumstance.

Here are some warning signs usually experienced by victims of loan scams:

Upfront Fees — Also known as “advance-fee loan scams,” these lenders offer a low interest loan in exchange for an upfront payment. They disguise their intent with fees for legitimate-sounding purposes such as applications, processing, or documenting. They all mean the same thing: “Send me some money before I perform any service.” Think about this: You are being asked to send money to be loaned money. Often, you’re asked to make payment via prepaid card — a digital gift card from Apple, Google, Visa or the like you find in supermarket kiosks. That’s a scam. Run.

Legitimate lenders disclose all their fees. Oftentimes, these fees are rolled into the cost of the loan, not paid for in advance. Advance-fee scammers may offer the same arrangement, and may even create a fake ACH — automated clearing house — deposit to your bank for the full amount. You’ll see it in your account as “pending.” But end the conversation the moment they ask you to send that gift card; they’ll drain the card and that pending deposit will never clear.

Phone Offer — It is illegal to make loan offers over the phone. Any offer must be put in writing. It must prominently mention all associated fees.

Wire Transfers If the lender wants you to wire money for fees, it’s a big cause for concern. Never wire money to an individual. Always ask for the lender’s physical address. Then contact the Attorney General or Financial Regulations office in that state to verify it’s a legitimate business.

No Interest in Your Credit History — Legitimate lenders evaluate a person’s creditworthiness before making a loan. Never listen to claims like “Bad credit? No credit? No problem!’’ There’s very definitely a problem — and it’s yours.

Copycat Name — In an attempt to appear legitimate, clever scam artists will invent a business name or website that looks or sounds genuine. It’s always advisable to check with the Better Business Bureau to authenticate the address and phone number. If the mailing address is a post office box, be very wary.

Also, have a hard look at the URL. Scammers will represent legitimate financial institutions on their websites, but when you  inspect their web address, you’ll detect subtle clues, such as percentage signs, @ symbols, misspellings, or strings of numbers.

Personal Information — Never give out your Social Security number, date of birth, bank account number, or other important personal information unless you are 100% convinced you’re dealing with a responsible lending institution. Personal information can be used for identity theft — which, according to the FTC, soared during the pandemic — or stealing from your bank account.

State Registration Lenders and loan brokers are required to register in the states where they do business. You can check registrations through the attorney general’s office or the departments of banking or financial regulation in your state. That won’t guarantee a perfect experience with the lender, but it could help you identify a crook.

Reviews — Online reviews have become influential when it comes to restaurants, museums and movies. They also can help you pick a reputable lender. You simply Google the company or person’s name, while also checking Facebook, the Better Business Bureau, or other sites that specialize in lending reviews. If there are complaints or bad reviews, take note. If there’s consistency across several locations, with everyone forming an unfavorable impression, that is a warning.

Customer Service — Reputable lenders have a phone number where you can easily call and get questions answered. If you aren’t comfortable with the customer service, you shouldn’t give the company your business. Don’t settle for the phone robots, either. You should be able to speak with a person.

Red Flags — There are several things that should prompt immediate concern. Be suspicious if email messages contain errors in spelling, capitalization, punctuation and/or grammar. That’s a lack of professionalism, at minimum. It also may mean you’ve chanced across someone in a foreign country, beyond the reach of U.S. law enforcement.

Be wary if you’re offered a free period (like a year with no payments) before the loan must be repaid. Definitely beware if the lender says they don’t use credit checks and will lend money regardless of past financial problems.

What to Do If You’ve Been Scammed

If you’ve been the victim of a loan scam or personal loan fraud, contact your local law enforcement as soon as possible. Notify, also, your state attorney general and the FBI (if the company was from another state or country). The Federal Trade Commission and Better Business Bureau also will be helpful allies.

You can file a report with the Internet Crime Complaint Center (IC3), a partnership among the FBI, the National White Collar Crime Center (NW3C), and the Bureau of Justice Assistance (BJA).

If you suspect there’s a website that is designed to look legitimate in an attempt to steal users’ personal information, report it to Google, Yahoo!, Bing, DuckDuckGo, or whatever search engine(s) you favor.

To file reports, provide the following information:

  • Your name, mailing address, and telephone number.
  • The name, address, telephone number, and web address of the individual or organization who perpetrated the fraud.
  • Specific details on how, why, and when you believe you were defrauded.

How to Spot a Legitimate Business

We have talked mostly about warning signs and red flags, but they’re not all bad eggs. How do you spot a legitimate business lender?

Here are some tips:

  • Research the name of the company itself, along with the company’s state license number, public phone number, and physical address, as well as the name of the person representing the company. Be alert to anything that doesn’t seem to match.
  • Call back the phone number to make sure it’s real and you readily can reach the company.
  • Match the physical address with the license number and phone number, if possible.
  • Search the company’s name online and look for any scam warnings or feedback from other business owners.

About The Author

Bill Fay

Bill “No Pay” Fay has lived a meager financial existence his entire life. He started writing/bragging about it in 2012, helping birth into existence as the site’s original “Frugal Man.” Prior to that, he spent more than 30 years covering the high finance world of college and professional sports for major publications, including the Associated Press, New York Times and Sports Illustrated. His interest in sports has waned some, but he is as passionate as ever about not reaching for his wallet. Bill can be reached at [email protected].


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