How to Avoid Bad Credit Loan Scams

Illustration of a man giving his money to a person who has two faces representing bad credit loan scams.
••• Alberto Ruggieri / Getty Images

One of the consequences of having bad credit is that it's hard to borrow money. Lenders perceive you as a risky borrower who's likely to default on loan terms, so many will deny your application. Because of this, borrowers with bad credit are often targeted by "companies" who offer bad credit loans. Unfortunately, these loans are often scams intended to trick you into giving up some funds.

In a bad credit loan scam, the "lender" often promises to send you a loan, but only after you first send a fee to obtain the loan. They may be as low as $50 or up to several thousand dollars depending on the amount you're borrowing.

The "lender" might call this a loan origination fee, loan insurance fee, or even loan collateral. You send the money and wait for your bad credit loan, but you never receive it. Unfortunately, by the time you realize what's going on, your money's long gone, and the lender is nowhere to be found​

It's against the law for a company to promise to loan you money in exchange for a fee - these are called "advance fee loans." Not only do legitimate lenders not require payment to let you borrow a bad credit loan, but it also doesn't make good financial sense to pay money to borrow money.

Signs of a Bad Credit Loan Scam

The most obvious sign of a bad credit loan is a request for upfront payment. Understand that with a mortgage or car loan, there will be a down payment or closing costs requirement. This cost goes to the seller and reduces the amount you have to borrow. These costs are different than what you will encounter with scam loans.

Advance fee and other bad credit loan scams typically guarantee you'll receive a loan, even before they've checked your credit. They promise to give you a bad credit loan regardless of your credit history, income, or a past bankruptcy. No legitimate lender will give you a loan without some assurance that you will pay the loan back.

Another sign of a loan scam is being asked to send upfront payment via a method other than U.S. mail, credit card, or a personal check. Because there are strict mail fraud laws in the United States, scammers don't usually receive mailed payments.

Instead, they often request that you wire the payment to them. Scammers are increasingly asking victims to send money via Green Money MoneyPak, cryptocurrency, and Venmo, which are all methods that are hard to trace or refund your money once the funds have been sent.

Be wary of lenders in foreign countries like Canada or the Caribbean. These are the two most common places that bad credit loan scams seem to originate. Just because the loan comes from somewhere other than those two places doesn't mean it's legitimate. Carefully compare the loan to the other criteria to verify the bad credit loan.

Beware of companies requesting your social security number, bank account number, or credit card number without providing you any written loan documentation. Avoid giving out sensitive information over the phone unless you initiated the call to a business you know and trust.

If You've Been Scammed

If you've been the victim of a bad credit loan scam, contact your local law enforcement as soon as possible. You should also notify your state Attorney General. Contact the FBI and the Federal Trade Commission if the company were from another state or country. It's also a good idea to let the Better Business Bureau know about the scam to alert other consumers about the trap.