A Tempting Loan Offer to Be Wary Of

A dismal economy, tight lending standards and mounting job losses have created the perfect storm for cash-strapped consumers — and the perfect opportunity for scammers.

Despite warnings from state attorneys general and organizations like the Better Business Bureau and the Federal Trade Commission, a growing number of consumers are falling victim to so-called advance-fee loan scams. Posing as overly-generous lenders with loose standards, scammers say they will give consumers a loan as long as they wire them money as insurance or collateral first. However, once the money is wired, it’s gone -- and the victim never hears from the “lender” again.

“When the economy turns south, [these scams] become more of a concern because they prey on people who are desperate to pay their bills,” says Alison Southwick, a spokeswoman for the Council of Better Business Bureaus, or BBB.

In 2008, the BBB received 2,300 complaints from victims, a 21% increase from the year before. And that’s just the tip of the iceberg, Southwick says. “People are either embarrassed to admit they fell victim to such a scam, or they don’t know who to complain to.”

Here’s how to spot an advance-fee loan scam and protect yourself.

A scammer will post an ad online or in a local paper offering loans that don't require a credit check. Once a consumer bites and contacts the lender, they often receive an offer (usually by fax or email) for a loan of between $5,000 and $20,000 at attractively low rates, some even in the single-digit percentages, according to Emily Peters, a personal finance expert at consumer information and advocacy site Credit.com, who helps victims file complaints and alert the authorities about the scam.

Due to the low rate being offered and the lack of a credit check, the lender says they can't secure the loan until the borrower either makes several loan payments or sends a one-time insurance payment first. The requested advance payments usually range from several hundred dollars to more than $1,000, according to Peters. One victim she recently worked with was offered a $7,000 loan, as long as she wired a $1,000 insurance payment first, or made five monthly payments of $177, before receiving the loan.

Once the consumer wires the money, it’s gone. There are no consumer protections for victims, says Peters.

* The lender asks you to pay fees in advance. Fees are an unfortunate — but perfectly legitimate — part of consumer loans. Lenders may charge you a fee for a credit check, for example. But legit fees are typically incurred after the loan has been delivered. Any fees requested in advance are a surefire sign that something is awry.

* The lender requests that you wire money. No legitimate lender will require you to wire them money. (Most advance-fee loan scammers are based out of Canada, so the money needs to be wired there — another giveaway that something is fishy, BBB’s Southwick says.) Instead, they'd require the fees be paid by a bank-certified check or allow them to be rolled into the balance of the loan.

* They don't do a credit check. These days very few lenders, if any, will extend a loan without the almighty credit check. (One exception is payday loans, an entirely different product. Read more about payday loans here.) If they aren't suspicious of you, then you should be suspicious of them.

* The lender’s name sounds familiar -- sort of. Scammers often steal a legitimate business’s identity, taking its logo and using a name that is very similar to that business, says Southwick. (Think something like Citigroup Financial, which sounds awfully like Citigroup Inc.)

* The lender’s web site is new. Scammers will create authentic-looking web sites for their fictional lending institutions. Go to whois.net to check out a site’s registration date, Peters recommends. If the web site has been created within the last week or even month, chances are it’s a scam.