The internet makes everything easier. You might consider yourself tech-savvy and comfortable with accomplishing tasks online—from ordering a pizza to paying your bills. But the stakes are higher when you apply for a loan online: You need to provide sensitive information to somebody you might not know, and you’re probably talking about a relatively large amount of money.
The safest way to borrow online is to ensure you’re dealing with a reputable lender and keep an eye out for red flags. You risk two major consequences when borrowing money online.
- Losing money: Fake lenders can easily set up shop, promise the world, and charge high fees for approving your loan. But you might not get what you paid for.
- Paying too much: Even if you receive a loan, you might end up paying a lot (in fees and interest) to a bad lender—spending thousands of dollars more than necessary. Reputable lenders will offer you the same funding for less.
Identity theft happens when you give your personal information to identity thieves or you submit it to a website that does not adequately protect your information (even if they don’t collect the information with the intention of stealing your identity). Items commonly found on loan applications are useful to potential identity thieves: your Social Security number, date of birth, current and previous addresses, and other personal details.
In addition to losing money, working with shady lenders can waste your time: You fill out applications, submit information, and follow up—and then you might need to clean up identity theft problems in the future.
Picking the Right Lender
Dealing with a legitimate and reputable lender will prevent most problems. Always research lenders you’re considering, and read both positive and negative reviews. Remember that everything on the internet isn’t true, and you might be reading reviews from employees or con artists. It’s safest to borrow from a lender that you hear about from a source you trust.
Before you apply, check for complaints with the U.S. Consumer Financial Protection Bureau (CFPB), which keeps a database of complaints about financial products. Those complaints and any response from the lender are posted online within 15 days.
Trustworthy referrals come from sources that you know are not just shills for a lender. Ask your friends and family where they’ve borrowed, and how the process was for them. You might also hear about good lenders from high-quality websites and podcasts. The better your source, the more confident you can be when you take out a loan (and the less likely you are to find yourself in a mess).
Less reliable sources should be avoided:
- A random email is not a good source of information. Spammers send those out by the millions, and you never know who you’re really dealing with. The same is true for old-school mail that arrives at your house.
- Unsolicited phone calls, especially from blocked numbers, are also notoriously used in scams. Even if the call appears to originate from a local number, the caller could be halfway across the world. With online tools, anybody anywhere can get a phone number that looks local.
If you’re dealing with a lender that is not a household name, use extra caution.
Watch for Red Flags
Sometimes con artists give themselves away. When you start talking with a lender, pay attention to how they operate before you hand over your personal information—or your money. If you observe any of the red flags below, find a different lender.
Reputable lenders don’t require fees up front. The “advance-fee scam” is commonly used by thieves, who convince you to pay a fee for them to process your application. There are legitimate loans that cost money to apply for, but they are typically large, like home loans (you might have to pay for a credit check or an appraisal), and those fees are clearly explained—often on official disclosure documents. If you’re getting a personal loan or an auto loan, upfront fees should be avoided. If you end up paying a fee, you can be sure they’ll keep trying to get “one last fee” out of you (over and over) until you catch on.
Lenders are not in business to lose money, so they can’t guarantee that they’ll lend to anybody. Some lenders are willing to take on more risk than others, but they still need to know something about your finances and mitigate their risk level. If you have no (or bad) credit history, no income, and no assets to use as collateral, how can a lender be confident that they’ll get their money back? Lenders who approve “anybody” are often smarter than they sound—they’ve found a way to earn high profits in exchange for taking big risks (which means you’re paying a lot), or they’re trying to steal money or data.
If it sounds too good to be true, it probably is.
Request for Funds by Wire or Western Union
If you are applying for a loan, you’re trying to get money—so why do you need to send money? Again, some loans require legitimate fees, but you can generally pay with a check or credit card—or pay the fees out of your loan proceeds. If lenders demand payment by wire transfer or other instant payment services (such as Western Union or MoneyGram), it’s almost certainly a scam. Once you send funds, the money is gone for good, and it’s almost impossible to find out who received the funds. On the other hand, a lender who accepts checks needs a bank account to deposit those checks in (which law enforcement can easily find), and credit card processors are quick to shut down vendors with a high number of complaints.
Unprofessional Sales and Service
Banks aren’t known for their warm and fuzzy interaction, but you shouldn’t get the sense that you’re dealing with a fly-by-night operation. A primitive website full of misspelled words and other errors could be a sign that you’re dealing with crooks. Security errors from your browser are also a bad sign. Finally, note how the sales staff speak with you—abusive, high-pressure behavior is a clear warning of what’s to come.
The Name Game
First impressions are important, and scammers with nothing substantial to offer choose official-sounding names (or confusing names). The word “Federal” in a lender’s name does not mean the U.S. government endorses the lender. Copying the name of a large bank with one or two letters changed is another sneaky tactic.
Some loans are dangerous, no matter whom you borrow from, and it’s easy to find those loans online.
Expensive loans can lead to a debt spiral that will leave you in a worse position than you were in originally. Payday loans and auto title loans are notorious for high fees that you pay repeatedly, which end up being the equivalent of triple-digit interest rates.
Unlicensed lenders are not supposed to lend in your state, but of course, they can offer loans and collect fees from anywhere on the planet. Check with your state’s regulators to find out whether a lender is authorized to do business where you live. Trustworthy lenders don’t “forget” to register or let their licenses lapse. If you have a dispute with a lender overseas, you probably have little or no legal recourse.
Illegal practices take advantage of people who are desperate to borrow or who do not have many options. Common practices include:
- Charging an interest rate that is higher than allowed in your state
- Renewing or “rolling over” high-fee loans more often than your state allows (you pay another fee each time this happens, and your debt load increases over time)
- “Packing” products like life or disability insurance into your loan without your agreement
- Breaking debt-collection laws, which limit how lenders are allowed to collect on unpaid or defaulted loans
Information Gatherers (and Sellers)
In your search for online lending sites, you might come across businesses that clearly say, “We don’t lend money.” The web is full of lead generation sites, which provide your information to lenders. Lead generators are good at marketing: You’re looking for a loan, and they can help you find somebody who’s willing to lend. Several large websites do that and offer a valuable service (while earning revenue from each loan they arrange), but shadier operations can cause problems. Be careful when providing information to sites that promise to shop the competition for you—they might just sell your contact information to a bunch of predatory lenders (or identity thieves) who will relentlessly attempt to get money out of you.
Safe borrowing means borrowing only as much as you need and can afford to repay. Lenders are eager to give you the largest loan possible (according to their calculations, which are based on your income). But you don’t have to borrow the maximum, and it’s rarely a good idea to do so. Even if you can afford the payments now, you never know what surprises may come in the future.