Avoid these scammer loan companies

Robert Powell takes a look at a loan scam that's doing the rounds again and explains what you can do to avoid becoming a victim...

The financial downturn is nothing but a huge opportunity for one group of people.

Yes, as most of us are scrimping and saving, fraudsters are scheming and scamming in an attempt to deprive us of our hard earned cash.

And one ‘classic’ method used by scammers to target particularly vulnerable consumers has begun to rear its ugly head once again...

The scam

The Office of Fair Trading (OFT) has warned people to steer clear of fraudulent loan companies that take upfront fees, but fail to provide credit or offer unsuitable alternatives.

The warning comes after the regulator observed a 50% year-on-year rise in complaints about such scams. Consumer Direct – the OFT-managed advice service – saw complaints increase from 2,059 between 1 July 2009 and 30 June 2010 to 3,167 throughout the same period in 2010-11.

In June the OFT estimated that 270,000 people had paid upfront fees to credit brokers in the preceding year.

Loan scammers have been taking advantage of the current tight financial situation that many consumers are finding themselves in by purporting to offer credit to those with poor financial histories.

The warning comes five months after Citizens Advice published a report showing that loan fee scams affect at least 110,000 people a year and cost the UK public £190 million annually. Figures from the charity also revealed that 840 million cold calls were made by debt management firms in 2009 alone. Read Five disgusting scams we hate to find out more about debt management fraud.

Avoid it

In response to this increased threat, the OFT has issued a set of dos and don’ts to help consumers spot loan scams:

Do be very careful when dealing with loan companies that charge upfront fees.

Do be cautious if a loan company cold-calls you.

Do some research about the business offering the loan; look for proper phone numbers and physical addresses.

Do check that the company has a credit licence on the Consumer Credit Register at www.oft.gov.uk/consumercreditregister.

Don’t believe adverts which indicate a loan is ‘guaranteed’.

Don’t give out your card details ‘for security reasons’ as the company may then debit your bank account without you knowing.

Don’t wire money to loan companies using money transfer services when applying for loans.

Don’t go ahead with a loan if a company approves it and then demands a fee before you get the money.

Legitimate loans

Of course, a further way to make sure you avoid loan scammers altogether is to go through a legitimate, reputable lender for any credit you may require.

However it is important to point out that no credit agreement – regardless of its size – should ever be entered into lightly. It sounds obvious but if you don’t absolutely need to borrow – don’t do it!  Personal loans can be a useful and sensible option for clearing costly debts or paying for essential purchases, but you should always be 100% sure that you can pay back whatever you borrow.

If you are absolutely positive that a loan is the right option for you, then take a look at these current rates for deals of between £7,500 and £15,000. I’ve included the total amount repayable and the monthly repayments for a £10,000 loan over five years.

*Excluding interest accumulated during optional payment holidays

As you can see, Sainsbury’s Finance leads the pack with a 6.30% rate, although it is worth pointing out that the Sainsbury’s deal is only available online and you’ll have to hold a Nectar Card to be eligible for it (you can pick one up for free by visiting a Sainsbury’s store).

You should also remember that the advertised loan rate isn’t necessarily the rate you’ll get on your deal. That’s because all of the APRs for the loans above are typical, meaning that just 51% of successful applicants can expect to get them. So if you have a dodgy credit history, you could be lumbered with a higher interest rate.

Alternative options

As I mentioned earlier, loans can be a sensible option for some – but don’t forget that there are a few alternatives:

Just save up: An obvious one really! If you can afford not to borrow, then don’t do it. Try opening up a savings account and stashing some cash away every month instead.

0% purchase credit card: Credit cards with zero interest on new purchases are an effective way to borrow smaller sums of money quickly and cheaply. The current market-leading deal in this sector is the Tesco Clubcard MasterCard offering 15 months at 0% on all purchases. However if you do go down this route, make sure that you clear off the whole balance before the 0% period runs out, or you could find yourself hit with spiralling interest rates.

Social lending: Social or peer-to-peer lending is a new phenomenon that allows online lending between users, cutting out the middle man of the bank. Again, this can be a good option if you’re after a smaller amount of money. Zopa is one of the biggest players in the sector and is currently offering an interest rate of 7.9% on a £5,000 loan paid back over three years.

Head over to our social lending comparison centre to find out more.

More: Compare loans | Three ways to get an interest-free loan | The cheapest way to borrow thousands of pounds