Most of us have been in a pinch where we needed some extra cash, fast. Maybe you can’t make your paycheck stretch far enough and need a little assistance to float you until next month. An unforeseen but unavoidable home renovation catches you off guard, and you need a new line of credit to cover the cost. Or maybe you’re early in your financial journey, your credit’s not the best, and you're struggling to find a bank willing to extend you a loan at a reasonable rate.
Borrowers in these situations are vulnerable, and predatory lending practices have evolved to take advantage of them while they’re in a precarious financial state. In the long run, these loans often only make the situation worse, digging the borrower into a cycle that leads to more interest paid over a longer period of time: a debt trap.
Fake loan offers can also be used by scammers to hustle you out of a phony fee, or even get access to your bank account and credit card.
But there’s a smart way to dodge these bullets. Here’s a quick primer on how to identify (and avoid!) some of the most common personal loan traps and scams.
One of the biggest hurdles to getting a good rate on a personal loan is a low credit score. A 2020 study found that around 16% of Americans have “very poor” credit scores (between 300 and 579). No-credit-check loans, or payday loans, might seem like a reasonable option if your credit score isn't quite where you want it to be, but they are best avoided. They’re designed to keep you on the hook, offering fast cash at very high interest rates.
From the lender’s perspective, payday loans are risky. In addition to the interest rate, some lenders offering loans without a credit check will insert extra fees into the application process to lessen their own risk.
If you're able, adding a co-signer with a higher credit score can get you a better rate on a personal loan.
A focus on "low monthly payments,” or a repayment period that’s either too short or too long
Some lenders want to emphasize low monthly payments. Of course, everyone would rather pay less money on their bills every month, but this can be a trap. “Low monthly payments” almost always means a longer term, meaning more payments, which translates to more interest paid in the long run. Low monthly payments at a high interest rate will end up costing you a lot more over time.
A very short repayment period is also a red flag. Some loans offer fast cash and take advantage of the weekly or biweekly lull between paychecks, trapping borrowers in a cycle of debt. A personal loan is typically paid back over a period of one to five years.
Upfront fees or collateral requirements
Any upfront fee for a personal loan is usually a bad sign. One common scam is the “advance-fee loan,” where a third party guarantees access to funds regardless of your credit history, but requires a "processing" or “insurance” fee in advance. Legitimate lenders may require an application or appraisal fee, but they’ll never guarantee the loan before you apply, and the fees are usually taken out after the loan is issued. A fee up front, or a request for “collateral” (like your bank information), are telltale signs of a common scam.
As with no-credit-check loans, advance-fee loans prey on people with low credit or a patchy credit history. Unlike no-credit-check loans — which may be predatory but are legal — advance-fee loan scams often end with the third party taking the money and disappearing.
Bottom line: beware any offer that guarantees you a loan but requires a processing fee or insurance fee up front. (And if you’ve fallen victim to this kind of scheme before, you might want to check out the Federal Trade Commission’s tips for what to do if you paid a scammer.)
Unsolicited loan offers
If you get an email you didn’t sign up for, from a company you don’t recognize, offering rates that look too low to be true: mark as spam. This is a common phishing tactic, with scammers on the other end of the operation angling to get hold of your bank account or credit card number.
Any legitimate lender will have a license to do business in their local jurisdiction. Check on your potential lender’s credentials before giving away any information, and don’t respond to unsolicited loan offers you get through email, social media, or robo-call.
How to compare loan options (and choose the best one for you)
There are a lot of moving parts to consider when choosing a loan: interest rate, fees, monthly payment amount, and repayment period are among the most important. You want to avoid high-interest, short-term loans, which is mostly what you’ll get with no-credit-check loans. And most loan offers that look too good to be true are probably a debt trap, or worse.
Here’s one option that’s NOT too good to be true: A Kasasa Loan will not charge you any upfront or hidden fees and will give you total transparency over the life of your loan. Our unique Take-Back™ feature even lets you reclaim money you’ve already paid toward your loan, giving you access to funds when you need them most.
Kasasa Loans can help you borrow smarter and avoid the pitfalls of predatory lending. If you’re already in a predatory loan, we can also help you explore options like debt consolidation, or loan refinancing, to get you out from a bad situation and into a flexible but affordable loan to fit your needs.