Financial institutions process numerous loan applications and work on issuing funds within immediate deadlines. With increased debt, banks and consumers noticed increased loan fraud cases. Until March 31, 2021, there were 45,613 loan fraud cases with 90 financial institutions and banks. Since the market is on a growth spree, implementing effective measures to lessen debt defaults related to bank loan fraud has become necessary. This article will discuss fraud loans and finance fraud detection. 

Did you know? Borrowers attempt to dupe lenders in a number of ways by presenting stolen or false information on their loan applications.

What is a Loan Fraud? 

When an applicant provides factually incorrect information on the loan application, it becomes bank loan fraud. This can happen when the loan is received or when the application is filled out. Sometimes, the bank unknowingly provides a loan to someone who might not be entitled, leading to substantial financial loss. 

The bank or a bank employee can also commit loan fraud by producing false applications. Here, the loan applicant suffers a financial loss. However, banks, as well as loan agencies, are the target of loan fraudsters. Loan agencies are an easier target as they do not ask for detailed personal and financial information from the borrower. Therefore, loan fraudsters can easily steal sensitive information and obtain a fast loan. 

The most frequently wanted loans are payday loans which are easy to get and are small in quantity. Sometimes, fraudsters can apply for loans that are larger in quantity for items like a car, house or business loan.

Also Read: SIM Swap Fraud – What it is and how you can stay safe

Example of Loan Fraud 

You may receive a text message saying, “ Congratulations, dear customer! You are chosen for a 0% interest-free loan of ₹2,00,000. Click on the following link to avail of this offer. No documents are required for a pre-approved loan. Offer valid for only 24 hours. Claim now.”

The Mode of Operation 

Loan fraud cases are mostly about impersonating reputed banks and lenders and finding people to make loan offers. These offers create a sense of insistence and include a hassle-free experience and easy money.

1. These offers create a sense of urgency and insist on taking action within 24 hours.
2. No background checks are required, and no credit history validation is needed.
3. Even though they are not trying to masquerade as reputed banks, they will not be registered with the Reserve Bank of India. Their loan applications will not be verified and will have no bad or good reviews.
4. There will be numerous hidden costs and fees in the terms and conditions, which will be brought to your attention once you agree to the deal.
5. If they are pretending to be employees, there will be a minor spelling mistake or a different domain name in the lender’s email address. 
6. They will also ask for upfront fees before disbursing the loan to your account.

How to Detect a Fraud Loan? 

Finance fraud detection can be difficult since loan fraudsters change states or banks frequently, complicating the process of spotting business trails or patterns. Banks, however, should keep an eye out for some red flags.

1.  Multiple Businesses Under a Single Person’s Name

If a person owns different businesses under his/her name without much income to prove their claim, it is a part of a scam by money launderers. 

2.  No Physical Address or Location of Business

If the business does not have a physical address, it should be looked up. In today’s internet era, anyone can own an online business. Thus, further investigations should be launched. In case it is a physical business, you need to investigate the number of employees, the validity of the mail drop address, and the business’s nature.

3.  A Startup Initiative is not a Running Business

Startup businesses are rising. Yet, new businesses involve a lot of risks. Loan institutes and banks need to carefully lend money to startup initiatives. Therefore, inquire about the operational and financial performance of the startup before signing any loan agreement. 

4.  Inflated Earnings

Generally, businesses inflate their profits to get bigger loans from financial institutions. To identify this, a data evaluation of the business is imperative. The lender will need to hire a financial analyst to help reject or accept the loan application. Some companies manipulate their books to make an impression on analysts and investors. 

5.  Lack of References 

It is common to inquire about references from a business or person seeking a loan. The borrower will need a serious background check if there are no convincing references. A business or someone with a credible network can easily detect loan fraud.

6.  Lack of Financial Audits

If the borrower’s financials have never been audited by an independent auditing firm, it is essential to investigate the company’s location. An audit can be requested if the bank is unsure about lending. Banks can also screen customers before extending credit as part of a standard fraud detection process.

Also Read: What is Request Money Fraud & How to Prevent it?

Red Flags to be Detected by Borrowers

In the case of fraudster lenders, the following red flags should be detected by the borrowers.

1. Research About the Lender 

Before accepting the loan offer, go through a rigorous research process from your end. Check the sender’s email address. Check if the loan application is available on a verified website and find detailed reviews on external websites. Ask if any third party has ever interacted with the business and how their experience was.

2. Refrain from Paying Upfront Fee

A genuine lender never asks for an advance or any monetary payment before approving a loan. Scammers use this tactic to extort money from you fraudulently.

3. Read the Fine Print

You should get access to the fine print to be informed about the inclusive charges of the entire scheme. Scammers deduct TDS upfront, charge ridiculously high fees to be disclosed later and harass your family, friends and you while collecting the same. This is illegal and harmful to one’s reputation. 

4. Check with Customer Care

Technological advancements and fake IDs make it easier to trick people into identifying scammers as people from legitimate companies. Always check with customer care to ensure the company is not impersonated. 

5. Do Not Take the Loan if it’s too Easy

A legitimate lender will conduct a basic credit history check, but if not, it is a serious red flag. A legitimate lender will conduct a screening before making a loan offer and approving it. The minimum credit score and eligibility criteria requirements may differ, but any legitimate lender will consider your financial borrowing history and credibility before approving any loan. 

Also Read: What is Social engineering fraud & how to protect yourself from it?

Conclusion

Loan fraud can take place in various ways. It has the potential to ruin your credit rating and get in the way of purchasing assets or starting a business. Many financial institutions only need a minimum amount during the loaning process. Loan fraud can happen anywhere you borrow money or extend your credit. From taking out student loans to opening credit cards, mortgages, and businesses.

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