8 Signs To Look for to Avoid Predatory Lending Practices
Are you looking for a personal loan but feel overwhelmed by your options? You’re not alone.
Choosing a lender can be scary, especially with so many different companies competing for your business. So when you’re looking for a personal loan, you want to do some homework… or you could get hooked by a predatory lender. It's important to avoid predatory lenders whenever you can, because their goal is to take the most possible money from you in any way they can.
By looking out for these red flags, you’ll be able to avoid ruthless lenders and find legit companies to work with. That doesn’t mean you won’t have to pay high interest rates. But it does mean that you’ll know exactly what you’re getting into, and have a realistic way to pay the loan back without completely destroying your financial future.
How to Identify a Predatory Lending Company
As you search your loan options, keep an eye out for predatory lenders so you can avoid using them to finance your loan. They especially prey on people who desperately need money, and act like they’re the perfect solution. But, really, they’re creating a problem.
They pretend to be helping you, but their only goal is lending you as much as possible at the highest interest rate possible. Even, and especially, if you can’t afford it.
Here are 8 red flags you can look for to help you avoid their trap:
If a loan deal seems too good to be true, it probably is. Predatory lending companies reel you in with the promise of plenty of quick cash, lower-than-market interest rates, and instant money regardless of how bad your credit score is. If the offer seems amazing, be wary.
If a lender says they’re not going to check your credit, run the other way. Reputable lenders will always run your credit. But predatory lenders don’t care. They’ve built in ways to get their money back, like through outrageously high interest rates that make credit card rates look tiny or by tricking you into putting up your car or home collateral. If they don’t bother with a credit check, walk away.
If you see any blank spaces on a contract, do not sign it. You don’t know what the lender is going to put in the space, and that leaves you extremely vulnerable. It can cost you thousands - even hundreds of thousands - of dollars. If there’s even one blank space, leave. Do not sign the contract.
If you see that your potential lender is charging dramatically higher fees for common loan costs like document prep fees or origination fees, it’s likely that they’re a predatory lending company. You shouldn’t do business with them. You can compare their rates to a well-known bank or lender to see if their fees are in line..
Predatory lenders use your fears and worries to pressure you into financing with them. If you feel pressured to sign when you’re not ready or comfortable, leave. If they tell you the offer will disappear if you don’t sign right now, leave. If your spidey senses tingle, leave.
You should be able to tell at a glance how much the loan is going to cost you - no surprises. That means you should be able to clearly see the interest rate, loan terms, fees, and penalties without searching for them. If you can’t, that’s a red flag, and you should walk away from the loan.
Forcing you to allow direct debits is a major red flag. Predatory lenders want access to your bank account so they can request payment repeatedly until it goes through. And if you’re in a tight spot one month, it could leave you on the hook for multiple overdraft fees. Reputable lenders will offer you direct debit as an option, but it won’t be the only way to make payments.
If you don’t understand something in your contract, ask the lender to explain it to you. If your loan rep doesn’t give you a satisfactory, simple answer, it may be a sign that you’re working with predatory lenders. Reputable lenders will make sure you understand everything in the loan documents and will clearly answer all of your questions. If your questions aren’t being answered, walk away.
Predatory lenders purposely prey on people who are struggling in financial quicksand. They know how to manipulate you into thinking they’re handing you a rope… even though they’re really handing you a cement block.
Even if you’re desperate to borrow money, try to find any other option. Even a cash advance on a credit card is better than working with a predatory company. Don’t allow yourself to be swept up by their promise of an easy way out. They will only make your financial situation worse for a very long time.
If you need to borrow money and want to limit the financial damage as much as possible, you’ll find practical alternatives and strategies in my book Debt 101.