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What is loan fraud and red flags to spot fraudulent borrowers

July 8, 2024

Eseose Animhiaga

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Lending comes with its risks, and adding technology into the mix can make things even trickier. Loan fraud, in particular, has gotten pretty sophisticated, so lenders need to stay alert and watch out for common scams and sneaky tactics.

According to the Financial Institutions Training Centre (FITC) report, fraudulent loans accounted for the highest loss, at 94.35 percent, with a value of N5.46 billion. This was followed by mobile fraud, which accounted for 3.39 percent of the total loss, amounting to N196 million.

To protect your lending business, you must stay vigilant, be prepared to spot suspicious activity early and implement a strategy to reduce it. Let’s examine loan fraud and discuss some common red flags so you, too, can stay one step ahead.

What is loan fraud?

Loan fraud occurs when an individual or a company misrepresents or omits relevant information with the intent to secure a loan that they may not be qualified for under pretense.

This can include providing false or misleading details during the loan application process, such as inflating income, fabricating employment history, presenting fictitious collateral, or hiding existing debt to trick lenders into approving loans that would not be granted if accurate information were provided.

The main goal of loan fraud is to get money by taking out loans with no plan or ability to repay. This can take many forms, such as using someone else’s identity to apply for a loan or submitting fake documents to support false claims. Loan fraud leads to major financial losses for lenders and damages the credibility of the lending ecosystem, ultimately hurting the economy.

What are the types of loan fraud?

There are four main types of loan fraud, each with its characteristics:

Identity theft occurs when criminals use someone else’s personal information to obtain loans, making the victims responsible for repayment.

Application fraud occurs when individuals provide false information on loan applications to deceive lenders into approving their loans.

Collateral fraud: In this type, the value of the collateral used to secure a loan is manipulated, resulting in deceptive gains for the fraudster and potential losses for the lender.

Employment and income fraud: Here, false employment and income details are submitted during the loan application process to secure financial benefits through dishonest means.

5 red flags to spot fraudulent borrowers

Being aware of the following warning signs is essential for maintaining safe lending practices. Here are the five most common red flags:

Abnormally large loan amounts

When loan applicants request amounts far exceeding typical lending practices, it should raise a red flag. Such unusually large sums may suggest an unconventional or questionable motive. In other words, if someone is asking for an excessively large amount of money – way beyond what seems normal – that’s a big warning sign. It makes you wonder, who really needs that much cash?

Unusual repayment terms

Any deviation from standard repayment terms, like irregular or non-traditional schedules, raises red flags. Legitimate loans usually stick to clear and transparent repayment plans. If the proposed repayment method seems unusual or suspicious – not the typical monthly payments – it’s a sign to be cautious. Real loans generally have straightforward repayment terms.

Forged documents

When reviewing documents, you must be vigilant. Look for signs of forgery or irregularities that might indicate fraud. If the documents seem fake or suspicious, trust your instincts—if something feels off, it likely is.

Discrepancies in personal information

Keep an eye out for inconsistencies in personal information, like mismatched names, addresses, or dates. These discrepancies might signal that the borrower is not truthful and their details are inaccurate.

Frequent loan applications

Constantly applying for loans is unusual behavior for most legitimate borrowers, who typically do not make multiple loan requests in quick succession. If someone frequently applies for loans, it could be a red flag indicating severe financial instability.

Stay one step ahead

The bad guys have gotten wiser, and so must you. Otherwise, they’ll run you out of business. Staying vigilant, understanding the red flags, and implementing robust strategies are essential for protecting your lending business from the ever-evolving threat of loan fraud.

It’s important to remember that proactive measures and a keen eye for suspicious activities can make all the difference. Let us help you lend safely and securely. Contact us at [email protected].