9 red flags to watch for when shopping for a personal loan

By Rebecca Lake

Reviewed by Jill Cornfield

Jun 27, 2024

Read time: 5 min

Mother with son in kitchen, shopping on internet for a personal loan

Key takeaways:

  • A personal loan could help you meet different funding goals when you need cash.

  • Lack of transparency, unreasonable repayment terms, and pushy sales tactics could be signs of a personal loan scam. 

  • Compare loan terms and rates to find the right lender and loan for you. 

Getting a personal loan could make sense if you need to cover a large purchase or unplanned expense, or you want to consolidate debt so you can pay it off faster. Personal loans for bad credit can help you get the funding you need even if your credit is less than perfect.

You don't want to choose just any personal loan, though. Learn to spot these red flags to help you weed out loans that don't match up with your needs. 

9 personal loan red flags borrowers should watch out for

Personal loans let you borrow money and pay it back with interest. They're usually unsecured, so you don't need to own anything of value to get one. You’ll qualify based on your credit standing and financial details.

That being said, not all personal loans are the same. So it's a good idea to know how to compare them—and to spot warning signs or scams. 

1. Personal loans with no credit check

Lenders usually check a borrower's credit to gauge risk. Your credit scores can influence the interest rates you qualify for. 

You might come across no credit check loans in your search for a lender, but they can be costly. Lenders may charge much higher rates for these loans since there's an underlying assumption that they're taking more risk. 

Pro tip: Look for personal loan lenders that offer rate quotes without impacting your credit.

2. Lack of transparency

If you're shopping for personal loans, you want to know something about them. For example, you might want to compare:

  • Interest rates

  • Fees

  • Repayment terms

  • Minimum and maximum loan amounts

  • Credit score and income requirements

Lenders don't always publish credit score and income requirements online, but the other details should be readily available. If a lender's website lacks the most basic information about a personal loan or they seem unwilling to answer your questions, that's a sign that you might want to look elsewhere. 

3. Hidden fees

Lenders can and do charge fees for personal loans. They can include:

  • Origination fees, which lenders charge to write the loan

  • Prepayment penalties if you pay your loan off early

  • Late fees

Reputable lenders will tell you what fees you'll pay, if any, before you borrow. It's a good idea to review the terms and conditions for a loan before signing to make sure there are no surprise fees that might apply. 

4. High-pressure sales tactics

Being rushed into a decision is never a good feeling, especially when you're borrowing money. Dealing with a pushy loan officer could lead you to rush into a decision. 

If a lender is bombarding you with calls or emails to get you to agree to a loan, ask yourself why they're being so aggressive. And don't sign off on anything until you've had a chance to look over the loan paperwork first. 

5. Misleading information

Coming across a bad credit personal loan with a low rate could make you feel like you hit the jackpot. The red flag pops up when you find out that the terms a lender is offering are different from what they're advertising online. 

Bait-and-switch tactics are usually classified as fraud by the Federal Trade Commission (FTC). However, that doesn't stop scammy lenders from using them. 

If you find a sizable discrepancy between the terms a lender initially offered and what they're offering now, that's a good reason to think twice before agreeing to a loan. 

6. Unrealistic promises lenders may tell you that you're guaranteed approval for a personal loan, but that's not the reality. 

Legitimate lenders usually want to look at your credit and income before approving you for personal loans. A lender who says they can approve you without any kind of qualifications may be making false promises just to get your business. Or they may be offering something that isn’t really an unsecured personal loan.

7. Requests for money

If you're seeking a personal loan, it's because you need money. So if a lender asks you for some kind of payment before getting a loan, that's a huge warning sign. 

Unless you're getting a secured credit builder loan that uses your savings account as collateral, you shouldn't have to pay anything out of pocket for a loan. 

Even if a lender charges a personal loan origination fee, that would come out of the loan proceeds. You wouldn't pay it directly. 

If a lender asks for cash or gift cards before they're willing to release loan funds to you, that may be the sign of a scam. 

8. Unreasonable repayment terms

You get a personal loan with the assumption that you'll have to repay it. But the repayment schedule shouldn't be designed to break your budget

The best personal loan term allows you to pay back what you owe at a pace you can afford. If you're being asked to commit to repayment terms that would put a serious strain on your cash flow, you might want to look elsewhere. 

Payday loans can fit into this category. When you get a payday loan, you agree to pay it back on your next payday.

Only what usually happens is that you need your paycheck to cover the bills. So the lender lets you roll the loan over until you get paid again. 

This can lead to a cycle of debt since it becomes harder to get caught up. And payday loans generally charge exorbitant interest rates, which is another reason to avoid them. Payday loans are banned in 18 states plus the District of Columbia.

9. Unnecessary add-ons

Lenders may try to pad a personal loan with a bunch of things you don't need, since that means more revenue for them. For example, a lender might tell you that you need to buy credit protection insurance as a condition of the loan. 

This insurance is supposed to help you cover your payments if you lose your job. If that doesn't happen, you'll have paid extra money to the lender for nothing. Most people don’t buy payment insurance for loans.

Knowing how to avoid this red flag (and all the others listed here) can take the stress out of getting a personal loan. 

Rebecca Lake - Author

Rebecca is a senior contributing writer and debt expert. She's a Certified Educator in Personal Finance and a banking expert for Forbes Advisor. In addition to writing for online publications, Rebecca owns a personal finance website dedicated to teaching women how to take control of their money.

Jill Cornfield

Jill is a personal finance editor at Achieve. For more than 10 years, she has been writing and editing helpful content on everything that touches a person’s finances, from Medicare to retirement plan rollovers to creating a spending budget.

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