The Financial Services Authority has issued a public warning after consumers lost £3.5m in fraudulent loan applications last year.
The regulator says it has seen a big increase in this type of fraud, with the number of people complaints about such scams rising by 44 per cent from 2016 to 2017.
These scams typically target those who are in distressed financial circumstances and looking for a short-term loan.
When searching for loan providers online customers are contacted by an unregistered firm, informing them that they have been approved for credit, provided they pay an upfront fee.
The FCA says some customers are persuaded to pay multiple fees, with the average loss being £740.
The regulator added that research shows that seven out of 10 consumers (72 per cent) had not heard of such lending scams. It urged people to check that a loan provider is authorised by the FCA first.
FCA executive director of enforcement and market oversight Mark Steward says: “In 2017 there were 4,7000 report of loan fees scams made to Action Fraud. It has now overtaken investment fraud as the most common scam reported to the FCA.”
He says that scammers often target the most financially vulnerable, on lower incomes and with poorer credit ratings.
This issue is complicated by the fact that some loan brokers charge a fee – but this is not normally paid upfront. These brokers should be fully authorised with the regulator, and if the loan does not then materialise consumers have a right to redress.