How to Avoid Personal Loan Scams and Frauds

30 June 2023
7 min read
How to Avoid Personal Loan Scams and Frauds
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In India, borrowing money is a common way to pay for needs like purchasing a home, starting a company, or paying for school. Yet, loan fraud has also increased as loans have become more widely available. 

Loan fraud happens when a borrower knowingly gives false information or hides material facts to obtain a loan. Lenders carry out dishonest practices like charging exorbitant interest rates, making loans available without the necessary paperwork, or abusing the borrower's personal information. Banks in India recorded over 9000 banking and loan fraud complaints in the past year, with an underlying total of over Rs 60,000 crore.

In this blog, we will go through the many schemes of frauds associated with loans that take place domestically and how borrowers may protect themselves from being a victim.

We will also look at the precautions that borrowers may take to safeguard themselves against dishonest lenders and make sure that their loans are received and repaid in a morally and legally righteous way.

Types of Loan Fraud

In India, there are many different forms of fraud. However, some of the most prevalent general, business and personal loan frauds in India include-

  1. Identity Fraud

Fraudsters who commit identity theft use the victim's name, address, social security number, and date of birth to apply for loans in their names.

  1. False Documentation

This happens when borrowers use forged bank statements, pay stubs, and income tax returns to apply for loans.

  1. Ponzi Proposals

In a Ponzi scheme, lenders promise large returns on investments, but instead of utilizing the funds to conduct genuine company, they pay off previous investors with the money received from new investors.

  1. Loan Flipping Strategy

Lenders often tempt consumers to refinance or take out additional loans to earn more fees and commissions, sometimes at excessive interest rates.

  1. Pay-in-Advance Fraud

This happens when con artists demand an advance payment or fee from the borrower in return for a loan they don't intend to provide.

  1. Forgery

Fraudsters who engage in forgery fabricate actual loan papers out of whole cloth or forge signatures on loan documents like promissory notes and loan agreements.

  1. False Loans

To get loans from banks and other financial organizations, fraudsters construct false loan accounts in the names of non-existent borrowers.

  1. Coordination Between Lenders and Borrowers

This happens when lenders and borrowers work together to cheat banks and other financial organizations by submitting forged paperwork or giving false information.

Interesting Fact to Know

Ghost Lending, commonly called Ghost Loans, is an intriguing sort of loan fraud where a borrower obtains a loan using false or counterfeit papers or identities. In extreme circumstances, the borrower may even use a deceased person's identity to get the loan.

Ways to Avoid Personal Loan Fraud

The following are some methods for borrowers to prevent fraud-

  1. Investigate the Lender

  • Doing a comprehensive investigation of the lender is one of the best techniques to prevent loan scams.
  • This entails determining whether the lender is accredited by the Reserve Bank of India or other regulatory bodies, confirming the lender's contact details, searching for testimonials and complaints from previous clients, and visiting the lender's official website to learn more about the loan options, charges, and interest rates.
  1. Verify Loan Documentation

  • Verifying loan paperwork is a crucial step in preventing fraud.
  • Borrowers should thoroughly check any loan agreements before signing them to ensure all terms and conditions are mentioned and understood. 
  • Consumers must pay close attention to any information in the loan agreement, including interest rates, repayment plans, costs, and other specifics.
  • Borrowers should contact the lender for clarification or seek legal counsel if something is unclear or confusing.
  • Confirming that the lender has received correct and current personal information is crucial. Borrowers can defend themselves against fraud and avoid taking out loans with unfavourable terms or circumstances by carefully reading and confirming the loan documents.
  1. Verifying Personal Data

  • An essential step in preventing loan frauds is by verifying personal information. Any personal information that is given by borrowers to lenders should be accurate and current.
  • Verifying their identity, residence, date of birth, and job information is part of this process. To make sure there are no mistakes or fake accounts registered in their name, it is also crucial to check credit reports.
  • Furthermore, borrowers should be aware of lenders that want excessive personal information, like passwords, social security numbers, and bank account details.
  • Scammers may use this information to steal their identities or carry out other fraudulent actions. Borrowers may guard against fraud and safeguard their financial security by validating personal information and securing sensitive data.
  1. Be Wary of Up-Front Costs

  • Be aware of lenders who want upfront fees since this is one approach to prevent personal loan scams in India.
  • Borrowers should only be required to pay any costs after receiving the loan since reputable lenders usually subtract any expenses, such as processing fees, from the loan amount. In addition, it's probably a fraud if a lender requests money before the loan is approved or disbursed.
  • Also, consumers should exercise caution when dealing with lenders who guarantee approval or pledge to extend credit to those with poor credit or no credit history. These deals might sound too good, but fraudsters frequently exploit them to prey on gullible borrowers.
  • Borrowers may defend themselves from fraud and prevent themselves from being victims by exercising caution when faced with upfront fees and deals that seem too good to be true.
  1. Steer Clear of High-Pressure Tactics

  • Avoiding lenders' high-pressure techniques is another strategy to prevent fraud. Unfortunately, scammers frequently employ high-pressure techniques to get consumers to make hasty decisions before fully knowing the loan's terms.
    They could also try to pressure consumers into signing loan paperwork before they have had a chance to read them thoroughly.
  • Lenders acting legally will offer borrowers enough time to evaluate the loan documentation and ask any questions they may have. Also, borrowers need to be wary of lenders that put undue pressure on them to take out higher loans than they can afford to repay.
  1. Employ Safe and Protected Networks

  • Another crucial element in preventing loan fraud is using secure networks. 
  • To avoid online loan fraud while applying for loans online, borrowers should exercise caution and only give personal and financial information over secure websites and networks.
  • Consumers should also be looking for phishing efforts from cons who beg for personal or financial information via unsolicited emails or phone calls.
  • To prevent illegal access to online accounts, utilising two-factor authentication and strong passwords is crucial.
  • By using secure networks, borrowers can reduce their chance of falling victim to fraud and guard their financial and personal data against theft and abuse.
  1. Take Advice From A Legal Advisor

  • Another essential step is seeking legal counsel. To ensure they completely comprehend the terms and circumstances of the loan and confirm the lender's legitimacy, borrowers should seek legal counsel.
  • A legal counsel can also review loan agreements and contracts to look for any conditions that might harm borrowers.
  • Also, a legal advisor may assist borrowers in understanding their legal rights and choices in case of disagreements or problems with the lender.

Conclusion

Loan frauds in India are a major problem that can lead to borrowers experiencing financial and emotional hardship.

Borrowers should be aware of the many forms of fraud, such as identity theft, phishing schemes, and predatory lending practices, and take precautions to prevent becoming victims of these frauds. Investigating the lender, reviewing loan documents, confirming personal data, being aware of upfront expenses and high-pressure tactics, seeking legal counsel, and using secure networks are ways to prevent fraud linked to loans.

By following these steps, borrowers may safeguard their financial security and make wise monetary judgments. However, to combat fraud and foster a safe and secure lending environment in India, it is crucial to keep a sharp eye out and report any suspicious behaviour to the proper authorities.

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Disclaimer: This blog is solely for educational purposes. The securities/investments quoted here are not recommendatory.

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