One of the consequences of having bad credit is that it's hard to borrow money. Lenders perceive you as a risky borrower who's likely to default on loan terms, so many will deny your application. Because of this, borrowers with bad credit are often targeted by "companies" who offer bad credit loans. Unfortunately, these loans are often scams intended to trick you into giving up some funds.
In a bad credit loan scam, the "lender" often promises to send you a loan, but only after you first send a fee to obtain the loan. The may be as low as $50 or up to several thousands dollars depending on the amount you're borrowing. The "lender" might call this a loan origination fee, loan insurance fee, or even collateral for the loan. You send the money and wait for your bad credit loan, but you never receive it. Unfortunately, by the time you realize what's going on, your money's long gone and the lender is nowhere to be found
It's against the law for a company to promise to loan you money in exchange for a fee - these are called "advance fee loans." Not only do legitimate lenders not require a payment to let you borrow a bad credit loan, it doesn't make good financial sense to pay money to borrow money.
Signs of a Bad Credit Loan Scam
The most obvious sign a bad credit loan is a scam is a request for upfront payment. (Note that with a mortgage or car loan there will be a down payment on a mortgage or car loan or closing costs.)
Advance-fee and other bad credit loan scams typically guarantee you'll receive loan, even before they've checked your credit. They promise to give you a bad credit loan regardless of your credit history, income, or a past bankruptcy. But, no legitimate lender will give you a loan without some assurance that you're going to pay the loan back.
One sign that you're dealing with a scammer is that the company asks/requires you to send upfront payment some ways besides U.S. mail and a personal check. Because there are strict mail fraud laws in the United States, scammers don't usually receive payments through the mail. Instead, they often request that you wire the payment to them. Scammers are increasingly asking victims to send money via Green Money MoneyPak, which is another method that's hard to trace once the funds have been sent.
Be wary of lenders in foreign countries like Canada or the Caribbean. These are the two most common places that bad credit loan scams seem to originate. Just because the loan comes from somewhere other than those two places doesn't mean it's legitimate. Carefully compare the loan to the other criteria to verify the bad credit loan.
Beware of companies requesting your social security number, bank account number, or credit card number without providing you any written documentation on the loan. Avoid giving out sensitive information over the phone unless you initiated the call to a business you know and trust.
What If You've Been Scammed
If you've been the victim of a bad credit loan scam, contact your local law enforcement as soon as possible. You should also notify your state Attorney General, the FBI if the company was from another state or country, and the Federal Trade Commission. It's also a good idea to let the Better Business Bureau know about the scam to alert other consumers about the trap.