Predatory Lending: Signs to Watch Out For
January 24, 2019 | By Louis TullyBlog Image
So, what is predatory lending? Experts define it as an unfair lending practice carried out by unethical means and deceptive tactics. Typically targeting folks with either bad or no credit at all, these are the types of loans that are too easy to pocket, but extremely hard to pay back. Loans of this kind usually come with higher-than-high interest rates and a host of other fees if the loan isn’t paid back on time. In a predatory lending scenario, it’s easy for the borrower to get trapped in an endless cycle of late fees, interest charges, and a whole new mess of debt.
How to Identify a Predatory Lender
While there are a lot of grey areas as far as what constitutes as ‘predatory’, there are some major signs consumers should watch out for. Ask yourself the following questions before doing business with any lender:
Is the Loan Approval Process Too Easy?
If a lender makes you an offer that sounds too good to be true, it probably is. An offer that promises money right now without any possibility of damaging your credit has to come with some strings attached.
So what’s the catch? Be sure to find this out before signing anything. Make the lender go over every inch of the loan agreement if you have to. It’s not overboard to let a lawyer look over the contract, too. Whatever you feel is necessary to make certain you know what you’re getting yourself into.
Simply put, as long as you know the actual cost of the loan and whether or not you feel confident enough to repay it, you’ve done enough homework to make an informed decision.
Are Costs Hidden from Plain Sight?
A common sign of nearly every predatory lending practice is hidden costs. If a lender has made it the least bit difficult to find out the cost for their loan product, run. Any lender who is truly in the business to help consumers with their financial squabbles will have no trouble disclosing their costs to you. Not only that, but the rates should at least be reasonable.
For example, when visiting a lender’s website, you should be able to easily find rates, late fees, term options, and a list of other info blocks front and center. The fact is that lenders are legally required to state their loan’s APR and all other costs. If this information is missing or out of plain sight, don’t even bother doing business with the lender.Blog Image
Are There Little to No Requirements for Approval?
A lender that doesn’t check your credit is not be interested in your ability to repay. Any company that’s not involved in the predatory lending practices will always check your credit, income and other factors for their protection and yours.
Predatory lenders will make up the risk of not checking your credit by charging outrageous fees and high interest rates. It’s the cost of being able to borrow money when your credit says otherwise. Even though consumer’s credit isn’t affected by taking out these types of loans, the vast majority of them have bad credit already or no credit to begin with.
Obtaining a loan with little-to-no requirements attached sounds too good to be true, but that’s because it is. While it may be super easy to get the loan, paying it back often turns into a completely different story with no happy ending in sight. Be wary of loan companies that does the following:
- Pushes you to borrow more than you actually need.
- Doesn’t check your credit or your debt-to-income situation.
- Asks you to pay the loan back in one lump sum.
- Allows you to borrow more even when you still owe them for a previous loan.
Does the Lender Require Electronic Payments Only?
A lender should never request your banking information as a requirement for taking out the loan. If a lender tries to set up automatic payments, be careful. The only person who should have control of sending payments is you.
A predatory lender may advertise this practice as being “convenient” or “an easy way to pay”, but it’s almost always a trick. They typically push electronic payments in the likely event that the borrower will fall behind on their loan. In this case, the lender can simply reach into their bank account and take the money instead.
If a lender asks for your checking account number during the loan approval process, say no and walk away.Blog Image
Does the Lender Report to the Credit Bureaus?
For better or worse, a good lender will always report your loan to at least one of the three major credit bureaus. This gives you an opportunity to use your loan situation to help build your credit. In doing so, you’re enabling yourself to borrow again in the future at much more affordable rates. With that said, missing payments will do just the opposite. But it’s worth the risk as long as you’re being offered a loan that you can afford in the first place.
If the lender promises to report your loan to the credit bureaus (even if it’s bad), it’s a sure sign that you’re dealing with a good lender. Never sign any type of loan agreement that goes unnoticed by the credit bureaus.
Are Too Many People Are Complaining About the Same Lender?
You normally wouldn’t take a chance at a new restaurant without referring to its Yelp page first, right? So why would you treat a new lender any different? An easy way to tell if a lender isn’t worth doing business with is to scope out their customer reviews. If a loan company has more negative reviews than positive, run. If they have no reviews to speak of at all, run even further!
So, where does one go to find customer reviews for a new lender? The Better Business Bureau is a good place to start. You can also conduct your search in the Federal Trade Commission Scam Alerts and even the Consumer Financial Protection Bureau’s complaints database.
Finding the Right Lender for You
Now that you know what to look out for, it’s time to get out there and hunt for the lender that’s right for you. And of course, if you want to avoid the need for this venture in the future, placing priorities on your savings, emergency funds, and debt is a great place to start.