How to spot loan scams and avoid them – Forbes Advisor INDIA


Demand drives supply in any market, and the financial services industry is no exception. As the industry grows and there is an increasing influx of players, there is also an undesirable corollary that crops up more and more frequently. This is the alarming trend of people being defrauded by deceptive entities posing as legitimate financial companies. This is especially true when it comes to loan fraud in India, as evidenced by the growing news stories of people losing money, property and, in extreme cases, even their lives to these fraudulent scams and of their consequences.

These cases, although extremely common, could be avoided with the right amount of examination and awareness. Let’s explore what a loan scam is and how you can avoid falling victim to such unscrupulous practices.

Types of scams you need to know about

Data Phishing

With the growing number of internet and smartphone users in India, the number of scams and fraudulent activities targeting them has also increased steadily. Financial frauds particularly target vulnerable people like the elderly or the financially illiterate, but none of us are immune to their destructive impact. Typically, data phishing is carried out by fraudsters under the guise of financial service providers ranging from well-known banks to companies peddling attractive new offers.

In the case of phishing-related lending app scams, the most common way people are targeted is through misrepresentation. Someone posing as a representative of your bank or financial services provider can visit your place of work or business or contact you by text, email or call and ask for sensitive information such as your card number, your PIN code and your OTP. If you end up leaking these details, it will give them access to your accounts and they will start stealing your money through transfers or transactions.

In some cases, scammers also create web pages resembling the website of financial institutions, and unless you look carefully, you can be tricked into entering your details on such a fake page, giving them access to your accounts.

Here’s what to watch out for to avoid falling victim to phishing scams:

  • Do not disclose any sensitive information like your bank account number, card numbers, PIN and OTP. Your bank or legitimate financial companies will never ask you for such information over the phone, by email or by post.
  • If someone calls you claiming to be your bank representative, verify their identity before continuing the conversation. Then check the bank’s official website to call the main bank’s number. If the call was real, they can verify it.
  • Do not amuse anyone who pushes you to act immediately in order to obtain a good loan. Don’t agree to pay upfront fees to get a loan faster.
  • Avoid lenders who are willing to disburse a loan without due diligence or KYC or background checks required.
  • When logging into a financial institution’s website, make sure it is genuine. Pay close attention to the URL and make sure it’s secure (HTTPS, not just HTTP).

Predatory lending apps

Digital lending in India has seen an explosion over the past five years or so. According to a report released by the Reserve Bank of India (RBI) in 2021, there was a twelve-fold increase between 2017 and 2020, and the Covid-19 pandemic has only accelerated it further.

The main reason why loan applications have become so popular in the country is that a large majority of Indians do not have access to formal sources of finance. Traditional lenders like banks are reluctant to lend without collateral or without a credit history.

It is therefore natural for this section of borrowers to turn to alternatives like loan apps that promise lucrative financing options with little to no documentation required. Although there is a plethora of legal loan apps that follow best practices and maintain transparency, their popularity has led to a huge push in the emergence of loan app scams that are illegal and predatory.

In fact, according to the RBI task force report, between January and February 2021, almost half of the 1,100 digital loan applications available in India were illegal. This alarming figure is supported by the rise in the number of people being duped by such scams, with app-based lenders being duplicitous about the interest rate, tenure, etc., and then harassing their borrowers to loan recovery. In many extreme cases, harassment and shaming by the lender or third-party collection companies hired by them has even resulted in deaths.

The most common lure of this scam is to offer fake loan apps advertising attractive offers that even promise zero interest rates for a limited time. You might even get a call telling you to act fast to get an instant loan without due diligence or background checks. This should immediately alert you, as any credible lender will generally check your sources of income, existing loan commitments, credit history and verify your repayment capacity before granting a loan.

In some cases, you may be asked for a small upfront commission to secure a lucrative loan, which is usually a sure sign of fraud.

Here’s what you do to avoid falling into the trap of predatory loan apps:

  • Do not download any lending app from app store that is not verified.
  • Avoid lending apps with low user reviews or negative ratings.
  • Avoid loan applications that don’t have clearly defined terms and conditions and fees, and just promise quick loans.
  • Don’t go with a lender that doesn’t require any documentation or background checks to give you a loan.
  • Avoid loan applications that are not affiliated with an RBI or NBFC registered bank as they are unregulated and illegal.
  • Check the lender’s website for a physical address, and if it doesn’t have one, avoid it.
  • If a lender offers nominal interest rates of 0% or similar, it may be a scam and you should do further research before applying.

What to protect yourself from potential scams

Doing your due diligence when choosing a lender and paying attention to obvious red flags can ensure a smooth and hassle-free loan experience. The more you research and secure your bases, the less likely you are to choose an unreliable lender.

However, it is important to keep in mind that even legitimate lending companies are not always above predatory or deceptive practices. For example, recently the RBI canceled the certificate of registration of five Non-Banking Financial Companies (NBFCs) for carrying out improper lending practices, including charging excessive interest rates and harassing customers for the recovery of loans.

The crackdown is a testament to the fact that although regulatory measures are in place for registered lenders like banks and NBFCs, predatory practices can still slip through the cracks and lead to difficult circumstances for borrowers.

It is essential to know your rights and obligations as a borrower or potential client of a credit institution. For example, after taking out a loan, the lender cannot demand immediate repayment and must wait a period of 60 to 120 days before classifying you as defaulting; but that doesn’t stop many unscrupulous lenders from demanding immediate repayment.

Here are some things to keep in mind to protect yourself from fraudulent loans and lenders exploiting legal loopholes:

  • Make sure the lender is registered with a regulatory body such as the RBI and follows regulatory protocol.
  • Make sure the lender has a dedicated, publicly available complaints handling system or customer help line, so you can contact them to resolve any issues.
  • Find out the exact interest rate cap for the loan and lender category, and make sure what you’re being charged is within the cap.
  • Check if the lender has positive ratings and reviews on the internet.
  • Check to see if there has been any negative media coverage of the lender in the past.
  • Make sure the lender does not have a reputation for using extreme recovery measures in the event of default.
  • Choose a lender who is transparent about their fees, practices and policies.
  • Make sure there is full disclosure of interest rates, full EMI and repayment amount, and prepayment penalties.
  • Make sure the lender offers a degree of protection to borrowers and flexibility in terms of repayment and default.

Despite your best efforts, you could find yourself in a difficult situation if you become the target of a loan scam, whether it is a fraudulent loan, an app scam, phishing, predatory practices or unscrupulous lenders.

Here’s what you can do if you suspect you’ve ever been the victim of a loan scam:

  • Keep a careful record of all transactions, including EMI payment receipts. Pursue legal action if the lender is found to be fraudulent.
  • File a police report for fraud with all the necessary details. In the case of a fake loan application or online scam, you can also file a cybercrime report.
  • Monitor your accounts closely for suspicious or unauthorized activity that may have been triggered by a fraudster.
  • Stop any unauthorized transactions by contacting your bank. As per RBI guidelines, if an illegal transaction is reported immediately, the bank will cover the amount lost if no fault is found with the account holder.
  • Block your current account and card and transfer your money to a new account if you believe sensitive information has been compromised.


When it comes to borrowing, the main thing to keep in mind when looking for a loan or changing an offer is that if it sounds too good to be true, it probably is. the case. Unrealistic interest rates, zero due diligence on the part of the lender, additional offers to sweeten the deal, etc. are all red flags that you need to consider carefully before choosing a loan option.

On top of that, selecting a lender after doing your research and ensuring they meet regulatory mandates and best practices is a surefire way to keep your lending journey seamless and hassle-free.


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