Loan Fraud 101: What You Need To Know To Protect Yourself From Scammers

Loan fraud, the act of someone using your personal information to illegally obtain a loan, is rising. According to the Federal Trade Commission, there were 204,967 reports of fraudulent loans in 2020 alone.[1] Loan scams can occur in many different ways, but the end result is the same: it affects your credit score and can damage your ability to secure loans in the future. 

We’ll show you what loan fraud is, how to spot it, what you can do to prevent it, and our top identity theft protection services.

Types of loan fraud

Loan fraud can happen anytime you borrow money or extend your credit, from opening up a credit card to taking out student loans. There are three main types of loan fraud, though many types of fraud schemes fall under these main categories.

First-party fraud

First-party fraud is when a consumer receives goods or services, promising to pay back at a later date with no intention of payback. Alternatively, the consumer could provide false information, like an exaggerated income, to obtain better terms on a loan. The catch is, you are the consumer.

Imagine you make a charge on your credit card, and instead of paying the balance, you file a fraudulent claim with your credit card company and pocket the change. The fraud is not the purchase transaction, but the fraudulent claim. Other examples of first-party fraud include:

• Chargeback claims, where fraudsters charge items on a credit card, claim they didn’t make the charge, and keep both the item and the refunded amount
• Intentional misinformation on loan applications
• Non-delivery claims, claiming a shipped item was never delivered
• “Deshopping” claims: when a shopper buys an item, uses it, and then returns it for a full refund

Second-party fraud

Second-party fraud involves two individuals, the fraudster and an accomplice. This type of loan fraud occurs when an individual gives personal information to another person to commit fraud. 

While some accomplices may be complicit in the scam, accomplices can also be unknowing victims, unintentionally passing along personal information, or tricked into the assumption that the fraudster has legitimate intentions. Examples of second-party fraud include:

• Second-party chargeback scams
• Fake merchant scams, where a scammer creates a fake merchant account to accept credit card payments
• Money muling, which occurs when an accomplice accepts funds into their account and then transfers the money into a separate account. A percentage of the funds may be used as payment, or the accomplice may be an unknowing victim.

Third-party fraud

Perhaps the most common type of loan fraud, third-party fraud is also commonly known as identity theft. Third-party loan fraud is when an individual uses a fake identity or another person’s information to gain credit or obtain a loan.

Scammers can steal your information by gathering your personal information from phishing attacks, tax returns, and even social media.

If someone has opened a credit card in your name without your knowledge, you’ve been a victim of third-party fraud. Other examples of this loan fraud include:

• Account takeover fraud: An account takeover fraud occurs when a scammer obtains access to an account and sensitive information. This enables the perpetrator to change account information (such as log-in and password), essentially locking out the victim, and withdraw funds from one or more accounts.
• Synthetic identity creation: Synthetic identity creation is the process of creating a false identity using real information from multiple individuals. With false and fabricated information, the fraudster creates a fake identity.
• False identity fraud: False identity fraud occurs when an individual creates a fake identity to commit criminal acts, such as creating a false identity to open bank accounts or secure a loan.
• Credit card fraud: Credit card fraud refers generally to any fraud pertaining to the use of a credit card, such as fraudulent charges or chargeback fraud.
• Mortgage fraud: This occurs when fraudsters use your personal information to apply for a mortgage loan in your name. Alternatively, some versions of mortgage fraud involve scammers applying for a reverse mortgage and stealing the home equity you’ve built.
• Deed fraud: Scammers can commit deed fraud by using your personal info to falsely claim ownership of your property. They'll then try to cash out by selling your property to someone else.

Loan fraud red flags

The types of loan fraud may differ, but many of the red flags are the same. Once you know what to look for, a loan fraud scam can be easy to spot. Watch out for some of these red flags:

Upfront fees

When you pay back a personal loan, you do so in monthly installments. A reputable lender will not ask for upfront payment or charge exorbitant fees to review loan paperwork. If a lender is requiring fees or payment upfront, it may be a sign of a scam.

Guaranteed approval

Reputable lenders generally have requirements that borrowers need to meet before being approved for a loan: income, credit score, proof of assets, employment and more are all requirements lenders assess before granting a loan. A lender guaranteeing approval without these requirements is likely offering subprime loans or running a complete scam.

If you have damaged credit or a hard time finding a loan, there are reputable lenders and resources available.

Debt clearance

Avoid offers to clear debt, as it’s almost always a sign of a scam. If you’re interested in making faster progress on debt reduction, work with your lender to expedite paying off your debt. Reputable lenders will not clear your debt.

Lender registration

Before working with a lender, check their registration to ensure they’re registered and authorized to work in your state. If a lender isn’t registered in your state, they legally cannot offer you a loan, and it would be a crime for them to offer one.

Cold-calling offers

Reputable lenders do not usually make offers by phone, door-to-door or via mail solicitations. Beware of alleged government agencies using phone calls or text messages to contact you, claiming you owe them money. Similarly, impulsive “act immediately” offers are usually a sign that a lender is fraudulent.

How to identify safe loan companies

Obtaining a loan requires sharing sensitive account information, and lenders have requirements to process a loan application, like your Social Security number, employment information, credit history, and financial information. When giving out your personal or financial information, do your due diligence to verify the legitimacy of your lender. 

Here are some ways to verify a lender is legitimate:

• Look for positive online reviews verifying the lender’s reputation and business status.
• Double-check the lender’s status with the Better Business Bureau (BBB).
• Ensure there is a valid online footprint, including a legitimate website, accurate phone number and address, and a professional URL.
• Typos or poor grammar can be a sign of a scam. Make sure communication from your lender is professional.

Tips to protect you from loan fraud

While loan fraud may be on the rise, there are preventative measures to keep you and your assets protected.

• Keep sensitive, personal information private. Don’t share your Social Security number or any account information with anyone, and if you’re sharing on a website, make sure it’s a reputable, verified website. Practice safe online banking habits.
• If someone calls you claiming to be from your bank or financial institution, verify their identity before sharing any information. Quickly search the phone number and see if it’s linked to any scams, and double-check the bank’s official website to make sure the phone numbers match.
• Before logging into online accounts, make sure the site is secured. If a site’s URL isn’t HTTPS (only HTTP), the site may not be secure.
• Make sure you’re familiar with your lender’s terms and conditions. Your lender should be transparent with their fees, terms, and conditions, and any fine print associated with your loan or account.

Here are our top recommendations for identity theft protection:

You’re a victim of loan fraud. Now what?

You’re a victim of loan fraud, now what? Time is of the essence when dealing with any type of loan fraud. Take these steps as quickly as possible to mitigate any damage:

1. Call your credit card company or any organization involved and freeze all of your accounts as soon as possible. 
2. After contacting your credit card company, call your local law enforcement agency and file a police report for identity theft. You may need an official police report to recoup losses or as proof of the incident. 
3. If personal information was stolen, beware of further identity theft. Monitor your credit score to ensure the scammers aren’t opening other credit cards or bank accounts. Review your credit reports for any unauthorized activity.
4. Contact a credit bureau (Experian, Equifax, or TransUnion) and request a fraud alert on your reports. If you think account information has been hacked, transfer funds to a separate account immediately.
5. Lastly, file a fraud report with the FTC and the FBI’s IC3. A report may help investigators stop the fraudster from scamming more people.

• FTC: https://reportfraud.ftc.gov/#/
• FBI IC3: https://www.ic3.gov/

FAQs

Bottom line

If a lender’s options sound too good to be true, they probably are. Debt clearance, unrealistically low interest rates, or other incentives are red flags designed to hook vulnerable borrowers. Knowing fraudulent loaners’ red flags and following the precautions outlined above can help keep you from falling prey to loan fraud.

Identity theft protection is a great way to prevent loan fraud and recover if you ever become a victim.