How to Avoid Bad Credit Loan Scams

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Borrowers with bad credit are sometimes targeted by "companies" that offer loans to risky consumers who seem likely to default on loan terms. Unfortunately, these "bad credit loans," also called "advance fee loans," are usually scams intended to trick you into paying the company money rather than the other way around.

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

How Bad Credit Loan Scams Work

A bad credit lender typically promises to send you money only after you first send them money in order to obtain the loan. The fee might be as low as $50, or it could be several thousand dollars, depending on the amount you're borrowing.

You send the money and wait for your bad credit loan, but you never receive the funds. Unfortunately, the money you paid is long gone by the time you realize what's going on, and the lender is nowhere to be found​.

Signs of a Bad Credit Loan Scam

The most obvious sign of a bad credit loan scam is a request for an upfront payment. Traditional mortgage or car loans require a down payment, but this money doesn't go to the lender. It goes to the seller and reduces the amount you have to borrow. Any legitimate fees are normally rolled into the loan. You don't have to pay them upfront. These costs are different from what you'll encounter with a scam loan.

Some other warning signs to look out for include:

  • You're instructed to send the upfront payment via a method other than U.S. mail, credit card, or a personal check. Scammers typically don't want to receive mailed payments because there are strict mail fraud laws in the U.S., and they don't want payments that can be easily traced. They're increasingly asking victims to send money via Green Dot MoneyPak, cryptocurrency, or Venmo—all methods that are hard to track or that won't refund your money after the funds have been sent.
  • Advance fee and other bad credit loan scams typically guarantee that you'll receive the loan before they've checked your credit. They'll promise to give you a loan regardless of your credit history, your income, or a past bankruptcy. No legitimate lender would give you money without some assurance that you'll pay it back, so this is another sure sign that you're dealing with a scam.
  • Be wary of lenders in foreign countries, particularly Canada and the Caribbean. Bad credit loan scams often seem to originate from these two areas. But it doesn't mean that a loan is legitimate just because the lender hails from somewhere else.
  • Beware of companies that request your Social Security number, your bank account number, or a credit card number without first providing you with any written loan documentation.

Always void giving out sensitive information over the phone unless you initiated the call to a business you know and trust.

How to Avoid Bad Credit Loan Scams

You're almost certainly safe from falling victim to an advance fee loan scam if you don't advance any fees. Don't fall for terms like "processing fee," "insurance," "origination fee," or any payment that's due in advance of you receiving the money you've supposedly qualified to borrow.

You might also want to avoid any company that reaches out to you by telephone, offering to send you money. Reputable lenders won't do this. You might receive a prequalified or preapproved credit card offer in the mail, but the lender won't ask you to send money if you decide to accept the invitation and submit the application.

Check with the lender's state licensing board if you have any doubts at all. Ask the lender for the state in which it's located. A scam lender will most likely disconnect communications with you at this point, and that's a clue in itself. Check the company's identity with the state's licensing board if you do get a location.

You might also want to check the company with the Better Business Bureau or the FTC. At least run a search online to see what turns up.

What to Do If You've Been Scammed

Contact your local law enforcement as soon as possible if you have reason to suspect that you're a victim of a bad credit loan scam. You should also notify your state Attorney General. Contact the FBI and the Federal Trade Commission if the company is from another state or country.

It's a good idea to let the Better Business Bureau know about the scam as well to alert other consumers about the trap.

The Bottom Line

Some consumers feel that they have no legitimate options for borrowing because they've had credit problems in the past, but this simply isn't the case. Rebuilding your credit is possible. Consider beginning with a secured credit card with a reputable company, such as Discover or Capital One, then be sure to make timely payments.

Until then, consider how a lender made you the loan offer. Did you reach out to them or did they contact you? Did they want money from you to initiate the loan? Where are they located? Don't part with your money until you can be sure the loan you're being offered isn't a scam.