How to Avoid Shady Lenders Online

Where are all the good loans?

illustration of a shark with a briefcase and wearing a tie
••• Lewis Mulatero / Getty Images

The internet makes everything easier. You might consider yourself tech-savvy, and comfortable with accomplishing things 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 make sure you’re dealing with a reputable lender and that you keep an eye out for red flags. There are two major risks when borrowing money online.

  • Losing money is a real risk: fake lenders can easily set up shop, promise the world, and charge fees for approving your loan. Ultimately, you don’t get what you paid for.
  • Paying too much: even if you get 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 give you the same loan for less.

Identity theft happens when you give your personal information to identity thieves—or you give it to a website that does not adequately protect your information (even if they don’t collect the information with the intent of stealing your identity). Items commonly found on loan applications are very useful for stealing your identity: your Social Security Number, date of birth, current and previous addresses, etc.

You could also argue that you lose when you waste your time trying to borrow from a bogus lender and spend even more time dealing with all of the applications and follow-ups.

Picking the Right Lender

Dealing with a legitimate and reputable lender will prevent most problems. Always research lenders you’re considering using 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’ve heard about from a source you trust.

Before you submit an application, 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 things went. You might also hear about good lenders from financial influencers or on high-quality financial podcasts. The better your source, the more confident you can be when you borrow (and the less likely you are to find yourself in a mess).

Less reliable sources should be avoided:

  • An email out of the blue 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 a blocked number, are also notoriously used in scams. Even if it looks like the call came from a local number, the caller could be halfway across the world. With tools like VOIP (and even free tools like Google Voice), 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 see any of the red flags below, find a different lender.

Up-front fees: reputable lenders don’t take fees up front. The “advance-fee scam” is commonly used by thieves, who explain that you need to pay a fee for them to process your application. There are legitimate loans that cost money to apply for, but those are typically large loans like home loans (you might have to pay for a credit check, an appraisal, and so on), and those fees are clearly explained—often on official disclosure documents. If you’re getting a personal loan or an auto loan, 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.

Guaranteed approval: 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 more risk than others, but they still need to know something about your finances and take sensible risks. 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? If it sounds too good to be true, it probably is. Lenders who approve “anybody” are often smarter than they sound—they’ve got 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.

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. 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 to have a “clean” 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 don’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 speaks with you—abusive, high-pressure behavior is a clear sign of what’s to come.

The name game: first impressions are important, and scammers with nothing real to offer choose official-sounding names (or confusing names). The word “Federal” in a lender’s name does not mean the U.S. government has endorsed the lender. Copying the name of a large bank with one or two letters changed is another tactic.

Dangerous Loans

Some loans are dangerous no matter who 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 before you started. Payday loans and auto title loans are notorious for high fees that get charged over and over which end up being the equivalent of triple-digit interest rates.

Illegal lenders are also a risk online.

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 if 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 individuals 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 this and offer a valuable service (while earning a few bucks on each loan), 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 try to get money out of you.

Borrow Wisely

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.