Choosing the right personal lender can be the difference between getting out of debt quickly or getting sucked into debt for years to come. Before borrowing, it is essential to find a reputable lender and avoid abusive lending practices that could overwhelm you with high interest loans.
But what is predatory lending and where can you find a list of predatory lending companies to avoid? Here’s how you can determine if a lender meets the definition of predatory loan so you can avoid them at all costs.
Predatory lending includes any unfair or abusive practice for the borrower.
These practices generally benefit the lender while making it harder or more expensive for a borrower to pay off debt. This is often compounded by lenders coercing, cheating or pressuring borrowers to sign these predatory loan agreements.
The goal of trustworthy lenders is to lend to qualified borrowers who will be able to repay their loan. With predatory loans, however, the lender seeks to take advantage of the borrower’s situation. To make money, the lender accumulates fees and interest that often exceed the original loan principal.
Predatory lenders often have terms that translate into benefits for creditors when you can’t make payments. Examples of predatory loans could include high late fees, penalty interest rates, or even the foreclosure of loan collateral (like repossessing a car).
Predatory lending practices can be found at any point in the loan buying process, from false advertising and pressurized sales tactics to an unaffordable free structure.
It is essential to watch out for the following seven signs of predatory lending. This is how you can protect yourself when shopping for a new loan. You will also avoid making commons personal loan errors.
1. 3-digit interest rate
2. Additional loan services and costs
3. Fees or charges for low (or no) credit scores
4. High risk secured loans
5. Rushed approval or paperwork
6. Loan reversal
7. Lying to you (or asking you to lie)
One of the main warning signs of predatory lending is high triple-digit interest rates.
Read your loan agreement carefully to make sure you understand how your interest will be charged and structured. Advertisements and loan agreements may highlight nominal (or monthly) interest rates.
Yet borrowers may assume that these are in fact annual rates and underestimate the true cost of the loan.
Abnormally high interest rates often indicate that a lender is more interested in making money. Rather than providing affordable credit to their borrowers.
With high interest rates, balances often grow faster than a borrower can keep up. Ultimately, this keeps them trapped in a cycle of debt.
Therefore, be sure to shop around before settling on a personal loan. Chances are, you can find a much better interest rate, even if your credit isn’t perfect.
A lender can build other costs into a loan, making it less affordable for a borrower but more profitable for the lender.
This is why borrowers should be wary if these fees are overlooked or not clearly defined. A lack of transparency regarding additional fees is a big red flag for predatory lending.
Many lenders, for example, will charge for additional services that are not part of the loan. It can be credit insurance for personal loans or even roadside assistance for car title loans.
A lender could pressure the borrower to accept these services. Or, let’s say the loan offer is contingent on payment for these services. But sneaking in fees, charges, or additional services are just ways for a lender to squeeze more money out of a borrower.
Many reputable banks and lenders offer personal loans for bad credit. It is also normal for these lenders to offer risk based loans which means that a better credit score will get lower rates. While someone with bad credit will get higher rates.
What’s not normal, however, is racking up fees and interest and relying on your bad credit history as justification.
Or the lender could withdraw a bait and switch – pretending at the last moment that you are not eligible for the product you requested and pushing yourself to choose a more expensive option instead.
To avoid this, be sure to check your credit report and your score. Plus, shop around to get a feel for the typical rates and loans you’ll qualify for.
And if your credit is less than ideal, look for bad credit personal loans from client-focused lenders like credit unions or lenders who don’t require a minimum credit score.
Another warning sign of predatory loans is to offer a loan that does not require a credit check. Or, it is offered to borrowers with poor credit but is guaranteed by an asset like a car title or the equity in a house.
The lender can use lax loan requirements to entice borrowers to take out a loan they cannot afford. And, if the borrower defaults, the lender can then claim their property (a house or a car, for example) to recover their costs at the borrower’s expense.
This predatory lending practice is called Federal Trade Commission dismemberment of equity. These types of loans can attract borrowers who may default and risk losing their homes or cars.
However, these are essential properties in the daily life of most borrowers. Therefore, losing them can have devastating and far-reaching consequences.
When signing a loan, it is important to have time to fully review all loan contracts and documents. Reading the fine print is always a must. This way you can make sure that you understand and can afford the loan you are accepting.
If your lender is trying to rush you to sign documents or tell you not to read them carefully, this is definitely a warning sign.
Predatory lenders rely on borrowers who have neither the time nor the know-how to understand their contracts. If they don’t want you spending too much time reviewing the contract, it could be a sign that it includes unfair fees or terms.
Plus, watch out for any unexpected paperwork. The second set of documents that you are asked to sign could be a sign of fraud. You should also watch out for any fields left blank, as the lender could go back and use them to change the terms of the agreement.
Ultimately, your personal loan agreement should be fully fleshed out and clear upon signing.
Debt refinancing can be a money saver. However, some predatory lenders will use it as an opportunity to make money.
Typically, refinance a loan will help you get a new loan at a lower interest rate than your existing debt. It could also offer you other favorable conditions, such as lower monthly payments.
However, with a predatory lending practice called reverse lending, the lender is actually refinancing with a new loan that has higher rates. And, it’s more expensive than the previous debt.
Or, your new loan may save you a small amount of money, but those savings are offset by the costs of getting a new loan.
Make sure you do the math and compare the cost of the refinanced loan with your existing debt. Many lenders will provide a comparison on request. If a lender is unwilling to do so, take a closer look at the terms they are offering.
Predatory loans often involve creditors failing to provide appropriate loan information or providing misleading information to borrowers.
Be sure to request and review a full disclosure of the loan, including rates, fees, and other costs. Most lenders are required by law to provide this information. If a lender is reluctant to provide all of this information, consider raising the red flag.
Also beware if the creditor tries to explain any fees or costs of the disclosure. Or if you feel that you are not getting a clear answer to your questions.
If a loan officer tells you to misrepresent yourself in any way on your loan application, that’s a huge warning sign. Sometimes they can encourage you to round up your income. Or, position yourself as a full-time rather than part-time worker to improve your chances of getting approved.
However, lying on a loan application is a form of fraud. And encouraging this kind of behavior is a sign of predatory lending.
Finding a trustworthy lender and avoiding predatory lending is important to keeping borrowing affordable.
This is why it is important to watch out for these predatory loan signs. And stay firm throughout the process and refuse to be pressured into getting a bad deal.
If you are unsure of a company, do some research to find out its reputation. Look for consumer complaints or warnings from sites such as the Better Business Bureau, the Consumer Financial Protection Bureau, or the Federal Trade Commission.
At the end of the loan process, you deserve a product that helps you meet today’s financial demands without sacrificing your future financial stability.
Rebecca Safier contributed to this article.