A scam is a scheme designed to gain the trust of the victim then rob the victim of the funds entrusted to the scammer. An advance fee personal loan is not in itself a scam, but is very susceptible to become a scam quickly.
The lender has a responsibility to deal ethically with the borrower in a situation where money is exchanged. Unfortunately, may scam-artists use this opportunity of trust to take advantage of uneducated or overly-trusting customers.
One can really turn anything into a scam with appropriate planning. This is just a more direct and easily manipulated scam.
The way an advance fee personal loan works is there is a demand for personal loans in the first place. People with cash crunches require a little extra help in a time of need. One can argue that these people are being preyed on, but lenders do not force people to take the loans.
With this high demand and a little creative marketing to convince people they need this loan, the lender paints a rosy picture and claims if the person just pays for the origination fees, the loan is theirs and all their problems are solved.
Trusting and uneducated people see the bright side of the loan without reading the fine details or thinking the lender may be ripping them off. They hand over the advance fee. Some legitimate lenders do require an advance fee to pay for some of the legal costs of setting up the loan, increase the profit and making sure the person is really serious about taking the loan. From a lender’s perspective, many of these borrowers waste the time of the lender and the advance fee shows the borrower is serious.
The problem comes in when the lender takes the advance fee and does not deliver on the promised loan. This is a breach of contract and should be treated as such. The loan itself is not the scam, the strategy to get money from people without delivering the promised product is the scam.
It is unfortunate so many people get “taken to the cleaners” by situations like this. The solution is to educate people on the pros and cons of loan products such as these. There are plenty of payday lenders, so shop around and use only trusted names (i.e. lenders you will be able to find the next day in case there is a dispute or legal action necessary).
Sometimes these fast loans are necessary for some people. Help people in your community to find a legitimate solution to their needs and be a good citizen. Everyone can make a difference in cutting off the demand for these loans and limit the scams associated with them.