Lending money inherently comes with risks. And it gets even riskier when fraudsters join the party.
In this article, we’ll look at the most common methods fraudsters employ to commit loan fraud, and – importantly – how to protect your business from them.
Loans allow us to buy homes, cars, and pay for education. But where there’s money, there’s often fraud. Loan scams cost Americans over $2 billion per year. From shady payday lenders to fake car loans, you need to know the most common types of loan fraud to protect your finances.
In this comprehensive guide, we’ll explain the top loan scams and frauds borrowers face today. Plus, how to spot the red flags before you become a victim.
9 Loan Frauds Borrowers Must Avoid
Here are the most common loan scams that target consumers and businesses today:
1. Credit Card Fraud
Credit card fraud refers to the unauthorized use of a credit card or credit card details to make purchases or take out cash advances.
The most common types of credit card fraud include:
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Account takeover: Criminals gain access to your credit card account by stealing your card number and other personal details. They can clone your card, make online purchases, or even change your billing address to rack up charges.
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Application fraud: Scammers open a new credit card account using your name, date of birth, and Social Security number, often obtained illegally online.
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Transaction fraud: Thieves skim your credit card details during an in-person transaction then reproduce your card to make counterfeit purchases.
Watch out for unfamiliar charges on your statement, fraud alerts from your card issuer, or a sudden hit to your credit score as signs of credit card fraud.
2. Car Loan Fraud
Auto lending fraud refers to deceptive practices by dealers or borrowers when applying for a car loan For example
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Odometer fraud The dealer manipulates a car’s odometer to show fewer miles than it’s actually driven This inflates the car’s value
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Income exaggeration: Lying about your income on a car loan application to get approved for more financing.
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Dealer fee packing Shady dealers pad the loan with excessive, undisclosed fees to make more profit.
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Title washing: Dealers hide a damaged vehicle’s history by manipulating the title records.
Car buyers can avoid auto lending scams by reviewing all paperwork, researching dealers, and getting pre-approved for financing before shopping for a used vehicle.
3. Advance-Fee Loan Scams
In an advance-fee scam, fraudsters promise loans or credit cards in exchange for an upfront “processing” or “insurance” fee. However, after receiving payment, they disappear without providing the financing.
Some signs of an advance-fee loan scam:
- They guarantee approval regardless of your credit score.
- You have to pay fees before receiving the loan.
- They insist you wire money or pay unusual ways like with gift cards.
Do your research before paying any company offering credit or loans. And don’t give out personal information or pay fees until your application is officially approved.
4. Mortgage Fraud
Mortgage fraud refers to misrepresentations on a home loan application to purchase a property or refinance your mortgage.
Some examples of mortgage fraud include:
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Income inflation: Exaggerating your income to qualify for a bigger loan amount.
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Appraisal fraud: Dishonest appraisers overvalue a home to justify a larger loan.
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Occupancy fraud: Lying that you’ll live in a home to get better mortgage rate when you plan to rent it out.
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Home equity scams: Tricking seniors into getting reverse mortgages then stealing the funds.
If you come across great mortgage terms that seem too good to be true, do your research. Unexplained changes to loan documents are also signs of potential home loan fraud.
5. Business Loan Fraud
Business loan scams target companies seeking financing with false promises. Some typical business loan schemes include:
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Advance-fee loan scams: Lenders collect upfront fees but never provide the promised funds.
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Pyramid schemes: Business lenders recruit “investors” whose money pays returns to earlier participants.
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Loan stacking: Borrowers apply for (and draw down) the same loan from multiple lenders without their knowledge.
Before getting a business loan, research lenders, read all terms closely, and watch for red flags like guarantees, pressure to act fast, or unusual payment methods.
6. COVID-19 Paycheck Protection Program (PPP) Fraud
The COVID-19 PPP program was designed to help small businesses through the pandemic by providing forgivable loans. But fraudsters took advantage by:
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Using stolen identities to apply for PPP loans then pocketing the money.
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Lying on applications about number of employees and payroll expenses to get bigger loans.
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Applying for duplicate PPP loans through multiple lenders.
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Spending loan funds on unauthorized purposes outside of paying employees and operating expenses.
The government is cracking down on COVID-relief fraud. If you suspect any suspicious activity with PPP loans, report it.
7. Payday Loan Fraud
Payday loans allow you to borrow against your next paycheck. But some payday lenders are predatory and use deceptive practices such as:
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Excessive rollover fees: Payday lenders push borrowers to “roll over” loans with expensive renewal fees rather than paying back the original loan.
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Unauthorized debits: After linking payday loans to your bank account, some lenders continue withdrawing money even after you repay the loan or revoke authorization.
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Phony leads: Scammers pretend to be payday lenders and ask for an upfront fee then disappear or sell your data to shady lenders that bombard you with offers.
Read the fine print, research lenders, and borrow only what you can afford to pay back on payday loans. Legitimate lenders won’t pressure you or frontload fees.
8. Student Loan Fraud
From financial aid scams to fake loan forgiveness programs, student loan fraud is on the rise. Watch for:
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Scholarship and loan scams: Imposters pose as the government and promise loans or grants in exchange for a “processing fee” that they pocket.
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Bogus debt relief: Companies falsely claim they can fix your credit or permanently lower monthly payments for an upfront fee.
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Loan forgiveness cons: Scammers pretend to provide student loan forgiveness application help but just steal your personal information.
Get guidance on student loans and repayment options from official sources like StudentAid.gov. Don’t trust unsolicited loan help offers or pay upfront fees to consolidate your student loans.
9. Bankruptcy Fraud
Lying during bankruptcy proceedings constitutes bankruptcy fraud under federal law. Common lies include:
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Hiding assets and income so creditors can’t make valid claims.
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Lying on your petition and schedules to appear eligible for Chapter 7 bankruptcy when you don’t qualify.
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Transferring property to friends or relatives so you appear insolvent and qualify for debt discharge.
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Making luxury purchases right before filing then claiming bankrupting during proceedings.
Provide accurate, timely information throughout the bankruptcy process. Omissions or deception can lead to denial of discharge, financial penalties, or even criminal charges.
How to Spot Loan Fraud Red Flags
Loan scams and predatory lending exist in many forms. Here are some tips for spotting red flags to avoid becoming a victim:
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Do your research: Check complaint sites like BBB.org and ConsumerFinance.gov to see if a company has a history of fraud accusations or practices considered predatory lending.
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Watch for pressure to act fast: Scammers rush you to sign contracts and make payments before you dig into the details. Legitimate lenders allow ample time for the borrower to understand the terms.
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Read the fine print: Don’t let pre-printed documents, quick conversations, or verbal promises distract you from analyzing the written loan details.
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Understand advertised rates: Lenders may claim “guaranteed approval” or “interest rates as low as 3%” when the actual terms are much less favorable.
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Avoid unusual payment methods: Predatory lenders often insist on payday loans via wire transfer, prepaid card, gift card, or another non-traceable method.
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Confirm licensing: Check state regulators to ensure the company offering you a loan has a valid license to operate in your state.
How to Report Loan Fraud
If you suspect a scam or predatory lending practices, report it to help authorities stop financial schemes and protect other consumers. Here’s where to report different loan frauds:
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Credit card scams – Report to card issuer and IdentityTheft.gov
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Auto lending fraud – Report to Federal Trade Commission (FTC) and your state attorney general
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Advance fee loan schemes – File a complaint with the FTC
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Mortgage fraud – Contact the Consumer Financial Protection Bureau (CFPB) and your state regulator
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Business loan fraud – Notify the Small Business Administration (SBA) Office of Inspector General (OIG)
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Payday loan schemes – Complain to the CFPB and your state attorney general
Government-Backed Business Loan Fraud Will Continue
Business loan fraud became a growing problem following the wave of government emergency loans resulting from COVID-19. Continuing economic woes in many countries make this an ongoing risk.
What Is Loan Fraud?
Loan fraud or lending fraud encompasses any kind of deceitful action designed to gain a financial advantage during the loan process.
There are many types of loan fraud, such as mortgage fraud, payday fraud, ATO in online lending, and loan scams. All of them will see someone end up out of pocket, while the counterparty will gain money and disappear.
In the US, this type of scam is on the rise, with an estimated 1 in 164 mortgage applications are deemed suspicious according to CoreLogic – though the landscape is much more dangerous online, where startups are looking to attract customers with frictionless and quick processes.
It’s worth noting that the roles of the victim or criminal may change depending on the type of lending fraud.
In some cases, the person or organization offering the loan (creditor) acts fraudulently. In other cases, it is the person or organization receiving the loan (debtor) who is acting in bad faith.
Loan Fraud Explained: How Thieves Get CASH With Your Credit | Aura
FAQ
How are frauds done in a loan?
What are the different types of lending fraud?
In general, there are three main types of lending fraud that lenders are facing, each depending on who is willingly engaged in the malicious activity: first-, second- and third-party fraud. 1. Personal loan fraud (first-party loan fraud)
What are the different types of financial fraud?
Financial fraud can hit you in several ways. Here are the most common types of fraud you should be aware of: 1. Identity theft leading to credit, bank, or loan fraud Identity theft refers to any kind of fraud committed by stealing personal information.
What are examples of mortgage fraud?
For example, a home buyer may lie about their employment status, income, property value, credit situation or other aspects of their finances in hopes of obtaining a loan approval or more favorable loan conditions. Why Commit Mortgage Fraud?
What are common loan fraud methods?
A common loan fraud method is through identity theft. This happens when another person’s identity, including the victim’s personal and financial information such as Social Security number, birth date or credit history is falsely used to apply for a loan application.
What are the most common mortgage fraud scams?
Common individual mortgage fraud scams are identity theft and income/asset falsification, while industry professionals may use appraisal frauds and air loans to dupe the system. Predatory lending activities, foreclosure rescue, and mortgage reduction scams all contributed to the Great Recession in 2007.
What are the most common types of transaction fraud?
Another very common type of transaction fraud is referred to as a non-arm’s length transaction. This occurs when the two parties involved in the mortgage loan have a personal relationship in some way, making both the lender and borrower susceptible to manipulation by the other.