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.
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.Start a SoFi Application Today
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?Here are the top personal loan lenders of 2018!
|Lender||Rates (APR)||Loan Amount|
|1 Includes AutoPay discount. Important Disclosures for SoFi.
2 Important Disclosures for Citizens Bank.
Citizens Bank Disclosures
|7.73% - 29.99%||$1,000 - $50,000|
|5.37% - 14.24%1||$5,000 - $100,000|
|8.00% - 25.00%||$5,000 - $35,000|
|4.99% - 16.24%2||$5,000 - $50,000||Visit Citizens|
|5.99% - 35.89%||$1,000 - $40,000||Visit LendingClub|
|5.25% - 14.24%||$2,000 - $50,000||Visit Earnest|