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I've been contacted by a company which offered to find me a loan in return for a fee. How can I tell whether or not the offer is legitimate?

With their offers of instant money and long-term repayment options, many loan companies claim to offer financial breathing space for Britons struggling to make ends meet.

Unfortunately, those gilt-edged promises often mask a trap that can force loan applicants to pay out substantial sums of money for borrowing that never appears.

Bogus loan companies prey on the indebted by placing adverts on the internet or in local newspapers and magazines.

Those who reply are told that they must pay money up front - from £35 to £2,000, according to Citizens Advice - before the loan can be arranged.

But the promised loan never appears while the loan company keeps the cash and is often never heard from again, leaving many ever deeper in debt.

What should you be looking out for?

The best advice to avoid loan fraud is simply this: be wary.

Be suspicious of companies offering quick and easy cash and especially of firms which promise approval regardless of the applicant's credit history: deals that seem too good to be true are usually just that.

However, loan fraud is growing even more sophisticated so don't assume that more restrained sites are safe, look deeper into the companies.

Avoid companies who cold call and text and look for a registered address or real world presence, for example.

Most of all, though, if you do feel somewhat suspicious don't provide your bank details - some have had their accounts raided after doing so - and avoid paying money upfront, regardless of what the company may say it is for.

Remember that an additional payment is 'upfront' up until the point at which you've got your borrowed money in your account.

Some fraud firms give approval followed by a demand that the applicant pay for insurance to cover the loan. Once it's paid, however, the applicant never hears from the company again.

Where to go for help

If you think you've spotted a loan scam

Action Fraud will be very pleased to take calls from anyone who has sniffed out a scam or suspects fraudulent activity.

They can be contacted on 0300 123 2040 or you can report your suspicions through an online form on the Action Fraud site .

If you can't get back money you paid for a loan

If you have paid money to a broker to arrange a loan for you, only to discover that they have failed to do so, you're perfectly entitled to ask for your money back. Keep copies of any correspondence sent to and received from the broker.

If they won't cooperate, let Trading Standards know what's happened: you can find the contact details of your local office on their site .

The law - in the form of the Consumer Credit Act - says that if a broker fails to deliver a promised loan within six months the maximum they can keep is £5. All other monies must be refunded.

You could also contact an independent consumer charity such as Citizens Advice for some support as you make your claim.

Unfortunately, however, the chances of recovery are slim.

According to Teresa Perchard of Citizens Advice, "once you've parted with your money there is little chance of getting it back.

"We urge people to be very wary of signing up for loans that require a payment upfront - the chances are this is a scam."

Alison Preszler, a spokesperson for the Better Business Bureau, agrees that making a legal case against loan companies is often difficult.

"Most of them are online", she says, "so the scam website is up one day and down the next, and the perpetrators have moved on."

If the loan company passed on your details

While it may sometimes seem like loans companies can somehow smell debt, the truth is that they often share people's personal details between themselves.

According to Citizens Advice, one of its clients began to be contacted by loans companies after applying for a loan from his bank.

The result of this eager sharing between loans companies is an intrusive barrage of cold calls, texts, emails and letters - Citizens Advice said that a staggering 840 million cold calls were made by debt management firms in 2009.

In the UK, it's illegal for companies to call those who have indicated that they don't want the calls.

Ask to be removed from any databases held by the caller's company and join the telephone preference service register by visiting TPS Online .

Write down the number of any nuisance callers if you can and send them to Phonepayplus to get them blocked.

If you're considering a loan to get out of debt

Loans are very rarely the answer to debt problems. While they may provide a little respite, the rapidly accumulating interest means that they can be difficult to clear in the long-term.

Debt consolidation loans sell the idea of tying up existing debts into a neat bundle that requires a lower overall monthly payment.

While this sounds tempting, there are some big downsides. For example, homeowners who fail to make repayments on a secured loan can lose their home.

Our consolidation guide has more details on this.

Before stampeding off into the land of loan, then, consider other ways to manage any outstanding debt.

Seeking help and talking to others is the first step in lightening the load. See our full guide to debt advice for information on where to go.

Options for repaying debt include informal arrangements of payments to creditors over a set period of time, as well as more formal individual voluntary arrangements. Both easily beat borrowing to pay for borrowing.

Why is loan fraud increasing?

The most obvious reason for the increase in fake loans is that people have less money.

The economic downturn has seen the average household's finances take a savage beating while credit has become harder to come by.

Credit Action figures reveal that net lending in October 2011 rose by £1.3bn, with the average owed by every UK adult standing at £29,539 (including mortgages). This amounts to 122% of average earnings.

As virtually all of our basic survival needs require money, it's not surprising that a lack of it makes people desperate. Fraudsters capitalise on this desperation by coming out with offers that are too good to be true.

In addition, easily obtainable high interest loans have filled the gap left by the mainstream lenders new found caution and many of their sites don't look very different from fake loan firms'.

Another problem that will further fuel the fraudsters' potential for causing mischief are cuts which remove money from public bodies.

According to Teresa Perchard from Citizens Advice, these cuts "could result in cut backs in the vital local advice and regulatory services such as trading standards services which people turn to for help in these situations.

"Rogue traders and rip offs like this which thrive in recessionary times could be off the hook."

What's being done to stop it?

The Office of Fair Trading (OFT) is currently asking the Government to consider legislation to ban upfront fees altogether and place further restrictions on cold calling, the first method of approach for many fake loan firms.

The OFT released new credit brokerage guidance and revised debt management guidance in December 2011 which has resulted in revised rules for those working in the loans sector and an increased risk of those failing to meet a good standard of customer service having their credit licence revoked.

That should go some way towards guarding against merely incompetent firms, though it's unlikely to make any difference to truly criminal groups that set up false companies and just move on when they've got their money.