Run From These 7 Predatory Lending Warning Signs

predatory lending

When you need credit, choosing the right personal loan lender can be the difference between getting out of debt fast — or getting dragged down by your debt for years to come.

A reputable lender will usually help you secure a loan that you can afford. But there are other creditors out there using predatory lending practices that can ultimately hurt your finances.

A favorable personal loan offers you a win-win scenario by providing you with the cash you need now, along with affordable payments over your loan term.

Yet, predatory lending carries sky-high costs that make a loan unaffordable. And often times when you default or miss a payment — the lender profits.

Don’t let yourself get sucked into a shady loan agreement. Here’s how you can figure out if a lender fits the predatory lending definition so you can avoid them at all costs.

What is predatory lending?

Predatory lending includes any practice that is unfair or abusive to the borrower.

These practices usually benefit the lender while making it harder or more expensive for a borrower to repay a debt. This is often made worse by lenders that coerce, deceive, or otherwise pressure borrowers into signing these predatory loan agreements.

Trustworthy lenders make it their goal to lend to qualified borrowers who will be able to repay their loan. When a borrower repays the loan, along with any interest owed, that’s how the lender makes money. If the borrower defaults or can’t afford to repay a loan, a lender loses money.

With predatory lending, however, the lender is looking to take advantage of the borrower’s situation. These lenders are less concerned about making money through repayment. Instead, they pile on fees and interest charges that often exceed the original loan’s principal.

Predatory lenders often have terms that mean the creditor profits when you can’t make payments. These could include high late fees, penalty interest rates, or even seizure of loan collateral (like repossessing a car).

Predatory lending practices can be found at any point in the loan buying process, from false advertising to high-pressure sales tactics. Or, an unaffordable fee structure in repayment.

Watching out for the following seven signs of predatory lending is vital. It’s how you’ll be able to protect yourself when you’re shopping for a new loan. You’ll also avoid making common personal loan mistakes.

1. Three-digit interest rates

One of the biggest warning signs of predatory lending is high, three-digit interest rates.

For example, rates of 300% APR are typical on payday loans and car title loans. However, lending guidelines cap interest rates at 36% APR to be considered affordable, according to the National Consumer Law Center.

Closely read your loan agreement to make sure your understand how your interest will be charged and structured. Advertisements and loan agreements might highlight nominal (or monthly) interest rates.

Yet, borrowers might assume they are in fact annual rates and underestimate the real cost of the loan.

Interest rates that are abnormally high often signal that a lender is more interested in making a buck. Rather than providing affordable credit to their borrowers.

With high-interest rates, balances often grow faster than a borrower can keep up with. Ultimately, this keeps them trapped in a cycle of debt.

Therefore, make sure you shop around before settling on a personal loan. Chances are you can find a much better interest rate, even if you have less-than-perfect credit.

2. Add-on loan services and costs

A lender might roll other costs into a loan, making it less affordable for a borrower but more profitable for the lender.

That’s why borrowers should be wary if such fees are glossed over or not clearly outlined. A lack of transparency regarding additional fees is a big red flag for predatory lending.

Many lenders, for instance, will charge for add-on services that are not part of the loan. These might include credit insurance for personal loans or even roadside assistance for car title loans.

A lender might pressure the borrower into agreeing to these services. Or, say the loan offer is contingent on paying for these services. But sneaking in fees, charges, or add-on services are just ways for a lender to milk more money out of a borrower.

3. Fees or charges for low (or no) credit scores

Many reputable banks and lenders provide personal loans for bad credit. It’s also normal for these lenders to provide risk-based loans, meaning a better credit score will get lower rates. Whereas someone with poor credit will get higher rates.

What isn’t normal, however, is piling on fees and interests charges and pointing to your poor credit history as justification.

Or the lender might pull a bait-and-switch — claiming at the last moment that you don’t qualify for the product you applied for and pressuring you into a more expensive option instead.

To avoid this, make sure you check your credit report and score. Also, shop around to get an idea of the typical rates and loans you’ll qualify for.

And if your credit is less-than-ideal, look into personal loans for bad credit from customer-focused lenders like credit unions. Or, from other lenders like SoFi who don’t require a minimum credit score.

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4. High-risk secured lending

Another warning sign of predatory lending is offering a loan that doesn’t require a credit check. Or, it’s offered to borrowers with poor credit but is secured by an asset like a car title or home equity.

The lender might use lax lending requirements to attract borrowers into signing on for a loan they can’t afford. And, should the borrower default, the lender can then claim their asset (a home or car, for instance) to recover their costs at the expense of the borrower.

This predatory lending practice is called equity stripping by the Federal Trade Commission. These types of loans can attract borrowers who are likely to default and would be at risk of losing their home or car.

However, these are properties that are vital to day-to-day living for most borrowers. Therefore, losing them can have devastating and far-reaching consequences.

5. Rushed approval or paperwork

When signing onto a loan, it’s important to have time to fully review all contracts and loan documents. Reading the fine print is always a must. That way, you can make sure you understand and can afford the loan you’re agreeing to.

If your lender is trying to rush you into signing paperwork or telling you to skip reading through it carefully, that’s definitely a warning sign.

Predatory lenders count on borrowers not having the time or know-how to understand their contracts. If they don’t want you spending too much time reviewing the contract, it could be a sign it includes unfair fees or terms.

Additionally, watch out for any unexpected paperwork. The second set of documents you’re asked to sign could be a sign of fraud. You should also watch for any fields that are left blank, as the lender could go back and use those to alter the terms of the agreement.

At the end of the day, your personal loan contract should be fully fleshed out and clear upon signing.

6. Loan flipping

Refinancing debts can be a money-saver. However, some predatory lenders will use it as an opportunity to make a buck.

Typically, refinancing a loan will help you get a new loan at a lower interest rate than your existing debt. It could also get you other beneficial terms like lower monthly payments.

With a predatory lending practice called loan flipping, however, the lender actually refinances with a new loan that has higher rates. And, it’s more expensive than the previous debt.

Or, your new loan might save you a small amount, but those savings are offset by the costs of originating a new loan.

Make sure you’re doing the math and comparing your costs of the refinanced loan with your existing debts. Many lenders will provide a comparison upon request. If a lender is unwilling to do this, take a closer look at the terms they’re offering.

7. Lying to you (or asking you to lie)

Predatory lending often involves creditors who don’t provide proper loan disclosures or provide misleading information for borrowers.

Make sure to ask for and review a full loan disclosure, including rates, fees, and other costs. Most lenders are required by law to provide that information. If a lender is reluctant to provide all this information, consider a red flag raised.

Watch out, too, if the creditor tries to explain away every fee or cost of the disclosure. Or if you feel like you’re not getting a straight 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 might encourage you to round your income up. Or, put yourself as a full-time rather than part-time worker in order 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.

Avoid a predatory loan at all costs

Getting a trustworthy lender and avoiding predatory lending is important when it comes to keeping borrowing affordable.

That’s why it’s important to watch for these signs of predatory lending. And, stand firm throughout the process and refuse to be pressured into a bad deal.

At the end of the loan process, you deserve a product that helps you meet the financial demands of today, without sacrificing your future financial stability.

Interested in a personal loan?

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LenderRates (APR)Loan Amount 
1 Includes AutoPay discount. Important Disclosures for SoFi.

2 Important Disclosures for Citizens Bank.

SoFi Disclosures

  1. Terms and Conditions Apply: SOFI RESERVES THE RIGHT TO MODIFY OR DISCONTINUE PRODUCTS AND BENEFITS AT ANY TIME WITHOUT NOTICE. To qualify, a borrower must be a U.S. citizen or permanent resident in an eligible state and meet SoFi’s underwriting requirements. Not all borrowers receive the lowest rate. To qualify for the lowest rate, you must have a responsible financial history and meet other conditions. If approved, your actual rate will be within the range of rates listed above and will depend on a variety of factors, including term of loan, a responsible financial history, years of experience, income and other factors. Rates and Terms are subject to change at anytime without notice and are subject to state restrictions. SoFi refinance loans are private loans and do not have the same repayment options that the federal loan program offers such as Income Based Repayment or Income Contingent Repayment or PAYE. Licensed by the Department of Business Oversight under the California Finance Lender Law License No. 6054612. SoFi loans are originated by SoFi Lending Corp., NMLS # 1121636. (www.nmlsconsumeraccess.org)
  2. Personal Loans: Fixed rates from 5.49% APR to 14.24% APR (with AutoPay). Variable rates from 5.17% APR to 11.32% APR (with AutoPay). SoFi rate ranges are current as of July 1, 2017 and are subject to change without notice. Not all rates and amounts available in all states. Not all applicants qualify for the lowest rate. If approved for a loan, to qualify for the lowest rate, you must have a responsible financial history and meet other conditions. Your actual rate will be within the range of rates listed above and will depend on a variety of factors, including evaluation of your credit worthiness, years of professional experience, income and other factors. Interest rates on variable rate loans are capped at 14.95%. Lowest variable rate of 4.99% APR assumes current 1-month LIBOR rate of 1.22% plus 3.95% margin minus 0.25% autopay discount. For the SoFi variable rate loan, the 1-month LIBOR index will adjust monthly and the loan payment will be re-amortized and may change monthly. APRs for variable rate loans may increase after origination if the LIBOR index increases. The SoFi 0.25% AutoPay interest rate reduction requires you to agree to make monthly principal and interest payments by an automatic monthly deduction from a savings or checking account. The benefit will discontinue and be lost for periods in which you do not pay by automatic deduction from a savings or checking account.

Citizens Bank Disclosures

  1. Personal Loan Rate Disclosure: Variable rate, based on the one-month London Interbank Offered Rate (“LIBOR”) published in The Wall Street Journal on the twenty-fifth day, or the next business day, of the preceding calendar month. As of August 1, 2017, the one-month LIBOR rate is 1.23%. Variable interest rates range from 6.02% – 15.97% (6.02% – 15.97% APR) and will fluctuate over the term of your loan with changes in the LIBOR rate, and will vary based on applicable terms and presence of a co-applicant. Fixed interest rates range from 5.99% – 16.24% (5.99% – 16.24% APR) based on applicable terms and presence of a co-applicant. Lowest rates shown are for eligible applicants, require a 3-year repayment term, and include our Loyalty and Automatic Payment discounts of 0.25 percentage points each, as outlined in the Loyalty Discount and Automatic Payment Discount disclosures. Subject to additional terms and conditions, and rates are subject to change at any time without notice. Such changes will only apply to applications taken after the effective date of change.
  2. Loyalty Discount: The borrower will be eligible for a 0.25 percentage point interest rate reduction on their loan if the borrower has a qualifying account in existence with Citizens Bank at the time the borrower has submitted a completed application authorizing us to review their credit request for the loan. The following are qualifying accounts: any checking account, savings account, money market account, certificate of deposit, automobile loan, home equity loan, home equity line of credit, mortgage, credit card account, student loans or other personal loans owned by Citizens Bank, N.A. Please note, Citizens Bank checking and savings account options are only available in the following states: CT, DE, MA, MI, NH, NJ, NY, OH, PA, RI and VT. This discount will be reflected in the interest rate and Annual Percentage Rate (APR) disclosed in the Truth-In-Lending Disclosure that will be provided to the borrower once the loan is approved. Limit of one Loyalty Discount per loan, and discount will not be applied to prior loans. The Loyalty Discount will remain in effect for the life of the loan.
  3. Automatic Payment Benefit: Borrowers will be eligible to receive a 0.25 percentage point interest rate reduction on their student loans owned by Citizens Bank, N.A. during such time as payments are required to be made and our loan servicer is authorized to automatically deduct payments each month from any bank account the borrower designates. Discount is not available when payments are not due, such as during forbearance. If our loan servicer is unable to successfully withdraw the automatic deductions from the designated account three or more times within any 12-month period, the borrower will no longer be eligible for this discount.
5.67% - 29.99%$1,000 - $50,000Visit Upstart
5.17% - 14.24%1$5,000 - $100,000Visit SoFi
8.00% - 25.00%$5,000 - $35,000Visit Payoff
5.99% - 16.24%2$5,000 - $50,000Visit Citizens
5.99% - 35.89%$5,000 - $50,000Visit LendingClub
5.25% - 12.99%$2,000 - $50,000Visit Earnest
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Published in Credit, Debt, How to Manage Money Wisely, Personal Loans