What is an advance-fee loan?

An advance-fee loan is characterized by the requirement that fees are deducted from the principal before the borrower receives the funds. This means that the borrower must pay certain fees upfront, such as application or processing fees, which are subtracted from the total loan amount they are seeking. For example, if someone applies for a loan of $5,000 but has to pay $1,000 in fees, they will only receive $4,000 in cash. This practice can sometimes lead to issues, as borrowers may find themselves paying significant fees without ever receiving their expected funds, especially if the loan is part of a predatory lending scheme.

In contrast, options that imply no fees or different requirements—such as offering immediate cash without fees, requiring collateral upfront, or being exclusive to borrowers with high credit scores—do not accurately capture the definition of an advance-fee loan. These alternatives misrepresent how advance-fee loans operate and the implications of their fee structures. Understanding the nature of advance-fee loans is crucial for recognizing potentially deceptive lending practices and ensuring consumers make informed financial decisions.