Invest in You: Ready. Set. Grow.

Scam lenders are on the rise in the U.S. Here's how to know if a lender is legitimate

In this May 24, 2018, file photo, Rosa Franco, director of lending at Neighborhood Trust Federal Credit Union walks out of the bank to head upstairs to the offices of one of their financial partners in New York. 
Julie Jacobson | AP

If you didn't already know, scam lenders and loans are on the rise, fueled by the economic fall-out of the Covid-19 crisis. Bad lenders have been around for a long time, however, and though the tactics they employ may evolve over time, with a keen eye and some common sense, you should still be able to spot them pretty easily. The proliferation in recent years of online lenders has also created a renewed emphasis on researching lenders' online presence and any complaints. Here are some key red flags and how to spot them.

Where to Start

If you're being offered a loan by a company you haven't already vetted thoroughly, the easiest place to start doing so is online. A simple search query should generate enough to get you started - take a look at their online footprint, any associated customer reviews, or signs of negative news stories. Then, it's reasonable to follow-up with a lender search by name with both the Better Business Bureau (BBB) and the Consumer Finance Protection Bureau(CFPB). The BBB can provide a plethora of information, including customer reviews and complaints, and an A-to-F letter grade rating of a lender's reputation and business dealings.

Mark Schlipman, founder and CEO of Schlipman Wealth Advisors, suggests that contacting the BBB is the best way to start your vetting process.

 "Legitimate lenders must register with state agencies before soliciting or giving out loans. Contacting the Better Business Bureau is a way to determine if the lender is trustworthy, and to see posted reviews."

The CFPB allows you to search for any disciplinary actions taken against any lender or individual, enabling you to locate problematic business dealing histories. Finally, you may consult with your state's Attorney General; their offices are repositories of information on the worthiness of any businesses operating in your state, Schlipman agrees.

"Contacting your state attorney general is also recommended."

More from Invest in You:
Biden expected to extend the national ban on evictions through March 2021
How to fight Trump rule denying permanent residence to struggling immigrants
What your FICO credit score means

Red Flags

Another layer of protection from predatory lending comes from learning how to recognize some of the most common red-flag behaviors employed by scam businesses. According to the BBB, these can include:

  • Telling you to indicate on your loan application that your income is higher than it actually is.
  • Pressuring you to apply for a loan or to apply for more money than you need.
  • Pressuring you to sign documents you haven't read.
  • Promising one set of terms when you apply and later giving you another set of terms to sign—with no legitimate explanation for the change.
  • Telling you to sign blank forms and saying they'll fill them in later for you.
  • Saying you can't have copies of the documents you have signed.

In general, when it comes to borrowing, it's safest to borrow from a financial institution with which you already have an existing relationship, such as a bank or credit union. That's because they've already proven their trustworthiness, but also because you've earned theirs, as well: By building a relationship over time with a financial institution, you're likelier to enjoy lower interest rates or fees, and better customer support.

While shopping around for lower rates can be useful, it shouldn't come at the expense of greater risk exposure.

SIGN UP: Money 101 is an 8-week learning course to financial freedom, delivered weekly to your inbox.

CHECK OUT: A year after I started my side hustle, it was bringing in $10,000 a month: Here's what I've learned via Grow with Acorns+CNBC.

What's in Biden's $1.9 trillion Covid relief plan: Stimulus checks, unemployment support and more

Disclosure: NBCUniversal and Comcast Ventures are investors in Acorns.