Loan scams: what to look out for

loan fraud
"I've been contacted by a company which offered to find me a loan in return for a fee. How can I tell whether or not the offer is legitimate?"

More lenders and, as in this question, credit brokers than ever are now operating solely online.

Many sites are legitimate but some are scams, taking money or bank details to arrange loans that will never appear and leaving victims with no way to recover the cash or simply bombarding people than enquire about loans with calls and texts.

In this guide we take a closer look at these loan fraudsters.

How can you spot a scam? And what should you do if you've lost money to a fake loans site?

How to spot a loan scam

As we said above, it can be very hard to spot a fake loan or credit brokerage site.

We all know the names of the big banks, but most of us probably don't know the names of even some of the biggest online lenders.

Many are mostly found through Google searches and taken at face value.

That level of trust, plus the fact that many people looking for loans need to borrow quickly and feel that they have very few options, has made this market an easy mark for fraudsters.

So the best advice is simply this: be very wary.

Here are five things anyone looking to take out or find a loan online should be wary of.

1. Never trust an offer solely based on calls, texts or emails

As in the question above, many people who get caught out by loan scams are contacted by a lender directly.

If this happens, whether it's by text, email or through a phone call, it should set alarm bells ringing. Legitimate lenders just don't contact people out of the blue.

It might be worth following the next four steps to check the lender out but it's probably not, this is very suspicious behaviour.

2. Ask: 'is this too good to be true?'

However you come across a lender the next step is to ask: 'is this offer too good to be true?'

Many legitimate lenders offer loans for those with poor credit history but guaranteed loans, one any applicant will be approved for regardless of their credit history do not exist (more here).

Similarly, extremely low interest rates on short term loans do not exist and most real lenders in this market cannot offer very large loans.

Deals that seem too good to be true are usually just that.

However, that is not to say that it's ok to assume that offers that are similar to the big lenders are safe.

Loan fraud is growing ever more sophisticated so it also pays to check for other signs that the company is legitimate.

3. Check for an Interim Permission and other signs of real world presence

All lenders and companies offering to find their customers a loan in return for a fee in the UK must be registered with the Financial Conduct Authority (FCA), which has regulated small lenders and brokerage firms since April 2014.

As we update this article, in early July 2014, all of these firms must have an Interim Permission number from the FCA in order to keep lending. This will be the same as their old Consumer Credit Licence (CCL) number, which was the Office of Fair Trading (OFT) system.

As firms become fully authorised they may show an FCA registration number instead.

Either way, you can check this number through two databases the FCA Interim Permission register and, for fully authorised firms, the FCA firm search.

The listing will show a registered address, which you can check against the site, and sometimes a phone number or other form of contact, like an email, which, again, could be checked against the site or person you're looking at.

4. Check again

These checks have never been more important because some fraudsters have started stealing the registration numbers of legitimate lenders and using their names, or very similar names, as well as other forms of identification like addresses, what's known as a 'clone loan' scam.

The only way to guard against them is carrying out the checks above and being, as we said in point one, being especially wary of phone calls by, for example, hanging up and calling back on the lender's main number.

5. Be wary of paying upfront

Ultimately, the biggest sign of a potential scam is the upfront payment.

Fake lenders (not credit brokers) have given the following reasons for asking for cash - from £35 to £2,000, according to Citizens Advice - up front.

"Insurance is needed to cover the loan."
"You need to pay the first instalment on the borrowing to verify your details and activate the loan."
"We need this money to pay someone to set up the loan, it will then be taken out of your borrowing."
All of these were scams. Remember that an additional payment is 'upfront' up until the point at which you've got your borrowed money in your account.

According to Teresa Perchard of Citizens Advice, "once you've parted with your money there is little chance of getting it back.

"We urge people to be very wary of signing up for loans that require a payment upfront - the chances are this is a scam."

This rule is a bit problematic, however, because throughout this article we've been talking about credit brokers as well as lenders and credit brokers are allowed to take a fee to set up borrowing.

So another form of fraud is that a broker will take a fee, promising a loan, and then fail to deliver.

This is illegal under the Consumer Credit Act 1974 section 115 (full wording here) which says that if a broker fails to deliver a promised loan within six months the maximum they can keep is £5. All other monies must be refunded.

By promised loan we also mean a loan that is unsuitable, for example, because it's not for the right amount or costs too much, consumers have a right to reject these loans and still receive their fees back (minus £5).

However, as in many of the other examples we've looked at, it can be hard to convince a malicious, or simply incompetent, lender or broker of what they 'should' do.

Been caught out by a loan scam? What to do next

Hard, but not impossible.

Report it

Action Fraud will be very pleased to take calls from anyone who has sniffed out a scam or suspects fraudulent activity.

They can be contacted on 0300 123 2040 or you can report your suspicions through an online form on the Action Fraud site.

Regaining money lost through fraud

When money is lost through loan fraud the chances of recovery are slim.

Alison Preszler, a spokesperson for the Better Business Bureau, agrees that making a legal case against loan companies is often difficult.

"Most of them are online", she says, "so the scam website is up one day and down the next, and the perpetrators have moved on."

However, banks may be able to help. Read more on liability in fraud cases in this guide.

Getting back brokerage fees

As we noted above, anyone who has paid money to a broker to arrange a loan that hasn't materialised within six months is perfectly entitled under law to ask for their money back.

If the lender won't cooperate with this after several attempts it may be worth reporting them to the FCA Consumer Helpline on 0800 111 6768.

It's worth keeping copies of any correspondence sent to and received from the broker to establish grounds for a complaint.

It may also be worth contacting an independent consumer charity such as Citizens Advice for some support with the claim.

Stopping nuisance calls

While it may sometimes seem like loans companies can somehow smell debt, the truth is that they often share people's personal details between themselves.

According to Citizens Advice, one of their clients even began to be contacted by loans companies after applying for a loan from his bank.

The result of this eager sharing between loans companies is an intrusive barrage of cold calls, texts, emails and letters. Citizens Advice said that a staggering 840 million cold calls were made by debt management firms in 2009.

There are strong ways to fight back against nuisance calls, though. Our guide on stopping spam calls and texts has more information on how to get rid of the aggravation for good.

Get money help

Many of these loan scams target people who are desperate for further borrowing because they are already troubled by debt problems.

If that sounds familiar then now is the time to seek help.

This article is a comprehensive guide on where to go for free debt help in the UK.

Options for repaying debt include informal arrangements of payments to creditors over a set period of time, as well as more formal individual voluntary arrangements. Both easily beat borrowing to pay for borrowing.

Stopping fake loans

When we first wrote this article in 2012, we said that the increase in fake loans had been bought about by the economic downturn, which caused the average household's finances take a savage beating and credit to become harder to come by.

In retrospect, while that was clearly a factor, a bigger driver has been the growth in the payday loans industry, which has thrived online and which is easily imitated by fraudsters and fed by credit brokers.

Citizens Advice said that their bureaux received 490 complaints about credit brokers alone in June and July 2013 and about 3,000 cases involving brokers over that whole year.

In 2014, it feels like we're turning a corner on this.

The FCA took over regulation of the payday and credit brokerage markets in April and has promised to get tough on lending and introductions to lenders.

We'll see how that goes but with caution, since previous regulators have also promised action on this issue.

In 2011, Consumer Focus made a super complaint to the Office of Fair Trading (OFT) about fake or ill functioning credit brokerage and loan firms.

In response, the OFT said it would crack down on firms that advertise loan or loan sourcing services but do not hold consumer credit licenses.

The OFT released new credit brokerage guidance and revised debt management guidance in December 2011 which has resulted in revised rules for those working in the loans sector and an increased risk of those failing to meet a good standard of customer service having their credit licence revoked, but little really changed.