Digital Loan Scams: Here’s How You Can Avoid Them

The growth of lending apps has led to a notable increase in the availability of personal loans. In the last year, the growth of personal loans and credit cards has surpassed the overall bank credit growth of approximately 15%. While this accessibility has resulted in a concerning rise in loan scams, it is crucial to approach the situation with vigilance and adhere to a comprehensive checklist to protect your financial security when using digital loan apps, also known as instant loan apps.

Fraudsters posing as genuine lenders use various strategies to trick individuals encountering financial difficulties, especially those having trouble securing loans because of unfavourable credit history. In this fraudulent scheme, scammers reach out to vulnerable individuals with messages and links, asserting that a loan has been authorised for them. When recipients click on the link, they are prompted to provide access to their contacts, gallery, location, and other data. This tactic enables fraudsters to extract information from the devices of unsuspecting individuals seeking loans. Some common frauds also involve fraudsters asking for sensitive information, including government IDs, bank details, OTPs, and sometimes even upfront payments for a loan that will never be sanctioned!

Therefore, consumers need to stay informed about these scams and implement necessary measures to safeguard their finances. Although it may seem daunting, with some research and carefulness, you can steer clear of becoming a target of such fraudulent schemes.

Here are some tips to identify a potential digital loan scam:

1. Lender asking for an advance processing fee:

A common type of loan fraud is the perpetrator requesting an upfront processing fee for an instant loan that ultimately never gets sanctioned. The victim is assured of loan approval but is instructed to pay the processing fee in advance. After the victim makes the payment, the scammer vanishes with the money.

It's important to know that legitimate lenders typically do not charge upfront processing fees. Processing fees are either included in the total loan amount or are required to be paid after the loan approval. If a lender insists on advance payment of the processing fee, it is recommended to conduct online research to verify the authenticity of the lender before proceeding.

2. The loan offer seems too good to be true:

If you have received an unsolicited offer for a personal loan with an exceptionally low interest rate when you are facing urgent financial needs, this offer is likely to be a scam. Scammers request an upfront processing fee that is never reimbursed, or they ask for the sharing of OTP (One-Time Password), which is exploited to extract funds from the victim's bank account or credit card.

This fraudulent scheme is tailored to exploit individuals experiencing a pressing need for money and seeking rapid and effortless access to credit. It is crucial to recognise that if an offer appears overly beneficial, it could be deceptive.

3. The lender approves the loan without doing a credit check:

A personal loan is a type of unsecured lending that doesn't require collateral. Consequently, the borrower's credit score significantly influences the approval of a personal loan. If a lender asserts that they approve personal loans without assessing the credit score, exercise extra caution to avoid becoming a victim of such fraudulent practices.

4. Time-bound loan offer:

Time-bound offers are temporary promotions for loans that are available only for a specific brief period. Scammers may exploit these offers to target individuals urgently seeking quick funds, claiming to provide discounted processing fees or time-sensitive loan deals. This induces a sense of urgency, potentially leading individuals to make hasty decisions.

It is crucial to recognise that genuine lenders rarely offer such time-bound offers. Therefore, if a lender insists that the offer is only valid for a short period, it is essential to verify the legitimacy of the lender before proceeding.

Here's how you can avoid the digital loan scams:

1. Validate the credibility of the lender:

Before applying for a personal loan, it is crucial to confirm the lender's legitimacy. Conduct online research to ascertain if the lender is registered with regulatory bodies such as the Reserve Bank of India (RBI) or the National Housing Bank (NHB). Additionally, consider checking online reviews and ratings to check the lender's reputation.

2. Exercise caution with unsolicited loan offers:

Exercise caution if you receive an unexpected loan offer, especially from an unfamiliar source, when you have not expressed interest in a loan. Reputable lenders typically do not initiate unsolicited loan offers. Moreover, be particularly vigilant regarding offers that claim "no credit check required" or are time-bound.

3. Guard against sharing personal or financial information:

Beware of phishing scams where fraudulent entities posing as legitimate lenders request sensitive information like bank details, PAN numbers, OTPs, etc. Never disclose your personal or financial details to anyone.

4. Avoid paying upfront processing fees:

Authentic lenders do not require upfront fees for processing a loan. It is likely a scam if asked to pay an advance processing fee.

5. Scrutinise for concealed fees and charges:

Before submitting a loan application, meticulously review the terms and conditions of the loan agreement to identify any hidden fees or charges. Ensure you are aware of all associated costs and penalties for defaulting on the loan.

6. Exercise caution with unrealistic interest rates:

Be wary of personal loan offers featuring unrealistic interest rates. It is essential to compare offers from various lenders to secure a competitive interest rate.

7. Use a loan EMI calculator:

Before proceeding with a digital loan application, use a Personal Loan EMI Calculator to estimate your monthly repayments based on the loan amount and offered interest rate. This helps in assessing your financial capacity and avoiding excessive debt burdens.

What should you do if you fall prey to a digital loan scam?

If you find yourself falling victim to a digital loan scam, swift actions are essential to mitigate potential harm. Begin by immediately changing passwords for any accounts accessed or compromised during the scam, enhancing online security with robust and unique passwords.

Notify your bank promptly, particularly if the payment is recent, as they may freeze your funds before reaching the perpetrators. It is advisable to report the scam to relevant authorities, capturing evidence through clear screenshots of messages or website interactions. Compile a concise summary of your contact with the alleged individual or website and the ensuing fraudulent activities. You can use the National Cyber Crime Reporting Portal for online reporting. Avoid providing additional information or funds to the scammers, and cease all communication with them to prevent further exploitation.

To conclude:

Scams related to personal loans pose a significant financial threat to individuals. Safeguard yourself from falling victim to such scams by adhering to these guidelines. Exercise caution when encountering unsolicited loan offers, extensively research the lender, and refrain from sharing personal or financial information with anyone. By adopting these precautionary measures, you can guarantee a safe and secure personal loan experience, protecting yourself from potential financial harm.

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KETKI JADHAV is a Content Writer at PersonalFN since August 2021. She is an MBA (Finance) and has over seven years of experience in Retail Banking. Ketki specialises in covering articles around banking, insurance, personal finance, and mutual funds and has been doing it for over three years now.

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This article is for information purposes only and is not meant to influence your investment decisions. It should not be treated as a mutual fund recommendation or advice to make an investment decision in the above-mentioned schemes.