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Why You Should Never Pay Anyone Upfront to Apply for a Loan

The world of financial products is wide and varied. Sometimes, when you go to apply for a small business loan, it almost feels like the legalese and fine print is deliberately written to be misleading.

Well this may come as a shock, but there are unscrupulous lenders out there who are after nothing more than to tie you up into a contract and squeeze every last cent they can out of your wallet. (Okay, so that wasn’t really a shock, was it?)

There are plenty of people out there who want nothing more than to part you from your money, especially when you’re in the somewhat vulnerable position of needing to apply for a loan. And one of those scams is the increasingly prevalent “pay to apply for a loan” trick.

Here’s how the “pay to apply for a loan” scam works:

A false lender will qualify you, perhaps through the mail or over the Internet, for a loan. Once you’ve received the good news, the lender asks for a fee – usually somewhere from $150 to $500 dollars – in order to process the loan. More misleading still, these “lenders” will often tell you that the fee is for something that sounds realistic, such as for interest, collateral, insurance costs, or a lender or broker’s fee. At this point, the “lender” takes the money and runs, leaving you with money out of pocket and no loan.

Here’s what to be on the lookout for:

1. Lenders reach out to you – Sure some reputable lenders pay to reach out to you, but remember that they need to make up those marketing costs somewhere.

2. Their website is suspicious – These scammers often use disposable websites that they can shut down after taking your money. When applying for a loan over the internet, make sure the website you are using is a reputable one.

3. Beware anyone who asks for money upfront – Asking for money upfront before signing paperwork on a loan is almost always, if not always, a scam. Don’t fall for it.

4. Don’t transfer funds over a wire service – Scammers love wire services like Western Union because the money is extremely difficult to trace and almost impossible to refund. If someone is asking you to wire them money before they give you money, then it’s probably a scam.

5. Listen to your gut – Unscrupulous lenders prey on people who are vulnerable or uninformed. Even then, it’s likely you’ll have a feeling that something isn’t right when dealing with an unscrupulous lender. Listen to that feeling and do more research before proceeding with a financial transaction if something seems off.

The “pay to apply for a loan” scam is truly that — a scam. But there are also some lending grey areas you should watch out for. While not illegal, many brokers will bake their fees into the interest of a loan. This is an accepted practice, but it will end up costing you more money over the life of the loan. That’s why it pays to do your research before even beginning to apply for a loan. For example, sites like Fundera offer a free service to connect you with lenders, and we never bake fees into a loan!

If you feel like you’ve been the target of a financial scam, contact your local Better Business Bureau, your state’s attorney general, or the Federal Trade Commission. These offices are tasked with protecting the public and spotting scams before they become an epidemic.

Jennifer Dunn

Jennifer Dunn

Contributor at Fundera
Jennifer Dunn is a small business contributor for Fundera and owner of Social Street Media. She is also the community manager at GoDaddy Online Bookkeeping, and her long-standing life goal is to learn something new every day.
Jennifer Dunn