Paying for Your Loan? Think Again

This week, I want to tell you about yet another scam that is always widespread but is likely to grow during tight economic times: the advance-fee loan.

If somebody tells you they can guarantee you a loan if you pay a hefty fee upfront, that is the hallmark of an advance-fee loan scam. The fee usually ranges from $50 to $500. You shouldn't have to pay money to get money. This is not to be confused with things like small credit-report fees you pay upfront when you apply for a mortgage. The key difference is that you are not being guaranteed the mortgage. It is illegal to guarantee somebody a loan in exchange for a fee.

Click Here to Ask Elisabeth Your Consumer Questions About This Topic or Any Other Consumer Issue

The Federal Trade Commission, the nation's consumer watchdog, just took action against telemarketers who targeted people with poor credit and then pulled an advance-fee loan ploy.

The FTC says the defendants charged up to $250 and claimed the consumers would get a credit card with a large limit, despite their terrible credit. They also promised to report their use of the card to the credit bureaus to help them re-establish their credit. The FTC says it was all a lie. Consumers who paid the fee did not get a credit card. They got an online shopping card that could only be used at the defendants' Web sites and was useless for establishing credit.

Advance-fee loan scams are also one of the most common schemes reported to the Better Business Bureau. They never go away. So it's up to you to stay away. Here are some more characteristics to help you identify them.

"No money? No job? No problem!" This is the classic, seductive sales pitch of an advance-fee loan scam. The ads appear in the newspaper, on telephone poles and on the Internet. Telemarketers also hawk advance-fee loans. Don't fall for it. You'll give up your money and you'll get ... nothing. The bad guys have no intention of giving you a loan or a credit card.

Know the signs:

1. Be suspicious of companies that claim they'll guarantee you a loan despite bad credit, bankruptcies or unemployment. That's ridiculous. Legitimate lenders base their entire loan decision on whether you'll be able to repay your loan.
2. If the salesman says you are guaranteed to get a loan, walk away. No bank can guarantee you a loan upfront.
3. If the company asks for a lot of money upfront, that's wrong, especially if it's a generic "processing fee." A real lender may ask for money to cover a credit check, but credit checks don't cost very much. Credit card companies almost never charge for credit checks.
4. If the company claims it will refund your money if you don't get a loan, don't believe it. That's a common claim and part of the scam.
5. Advance-fee loan scammers sometimes ask you to call a 900 number to choose the loan you want. They then try to keep you on the line as long as possible to rack up 900 number charges.
6. If the company wants you to forward your payment by some method other than U.S. mail, be very wary. The company is probably trying to avoid mail-fraud laws. 7. Many advance-fee loan scams originate in other countries. Canada is the most common. I've also heard from consumers who sent their advance fees to companies in the Caribbean.
8. If the company does send you a card, it will be a card good for only its own merchandise, not a credit card. The company may claim that by buying its merchandise and then paying your bills, you can re-establish good credit. The truth is, the merchandise is overpriced and this kind of card isn't a factor in your credit rating.

How to Spot an Advance-Fee Loan Scam

Do Your Homework:

1. Never agree to a loan over the phone. Insist on seeing written documentation. If the company refuses, run the other way.
2. Never give out your Social Security number, bank account number or credit card number over the phone, unless you initiated the call.
3. Lenders may have to be licensed and bonded in your state. Find out if that's a state requirement and find out if the company in question has met that requirement.
4. Know the difference between an advance-fee loan and a secured credit card. Secured credit cards are legitimate tools for people who are trying to re-establish good credit. You deposit, say, $500 dollars with the credit card company. The company issues you a card with a $500 limit. You get the flexibility of paying by credit card instead of cash or check. If you make payments faithfully, the credit card company eventually increases your limit and refunds your deposit.

How to complain:

If you are the victim of an advance-fee loan scam, it's a criminal matter. Contact your state attorney general. If the company is based in another state or country, you may have to go to the FBI. Also complain to the Better Business Bureau so other consumers will be forewarned.