Getting a loan is sometimes the smartest thing to do in a tight financial situation. Home repair after storm damage, for example, is often paid for with a loan when repairs are urgent, then paid off over the next few months when you have time to make the money. It's common for folks to take a loan for a car they need to drive to work, or a small business loan for resources to generate more revenue. That being said, it is also true that the time when you most urgently need a loan is also when you are most at risk for predatory lending practices.
Most lenders are there to help you make safe and financially sound decisions. Most lenders want you to take out loans that you can comfortably pay off in a reasonable amount of time. But some lenders are predatory; they are out to make a quick buck and their loans are designed to be either more costly than the principle (cost more in fees and interest than the loan itself. or trap borrowers into an endless cycle of debt.
Protect yourself from predatory lending by knowing the red flags of a predatory loan or a shady loan officer.
1. No Credit Check
It is always shady when a loan is offered with no check on your credit. While there are many beneficial loans designed for people with low or no credit, the bank always wants to know where you stand first. If a lender offers you a loan with no credit check, read the fine print or just walk away.
2. Being Rushed to Skip Reading and Sign
Most loan officers will help you read through and understand each clause of the loan. Many will encourage you to take your time and read over the paperwork on your own. This gives you a chance to fully understand the terms and financial obligations you are signing to, along with any financial fees or potential penalties as well. If you are rushed to sign paperwork without reading it, this often indicates there are clauses they don't want you to see.
Also, watch out for requests to sign any additional documents. The additional paperwork - if left unread - might be fraudulent.
3. Blank Fields and Unexpected Extra Paperwork
Never sign a contract that includes blank fields. This gives the shady lender a chance to fill in details after you sign that will change the terms of the loan - while still being effectively legally binding. If the loan is to be filled out and signed by hand, make sure each blank space is filled with the correct value or a field-obscuring mark of '0.00' or 'NA' (do not just place a single zero, this can be manipulated). A printed document should have the fields automatically filled in by the computer.
4. Being Told to Misrepresent Yourself in the Loan Application
Some lenders will try to "help" you by telling you to misrepresent your information in the loan application. They may tell you to round up your income or report yourself as full-time instead of part-time to improve your chances of approval. If this ever happens to you, the lender is really trying to talk you into fraud, often a fraud that only you could be charged for.
5. Three Digit Interest Rates
Interest rates can go fairly high for last-minute or high-risk loans, but never take out a loan with interest greater than the principal. In terms of loan numbers, that means watch out for three-digit interest rates. Do the math to determine the annual interest (often predatory loans have monthly interest made to look at a glance like it is annual. and determine if you will be charged more for taking out the loan than the amount you need to borrow.
6. Creating a Debt Cycle with Loan Terms
Watch out for any loan that could turn into a constantly refinanced debt cycle. Many predatory loans are designed to create more debt than they relieve, and are targeted at people with limited means to pay back predatory fees and interest.
7. Deceptively Presented Rates and Graphs
Look carefully at the numbers. As previously mentioned, sometimes interest is monthly when it looks like it could be annual. Deceptively labeled and presented numbers are a hallmark of predatory loans. Look carefully at the data, especially taking note when the true data does not match your conversation with the lender.
8. Access to Your Bank Account for Direct Withdrawals
Lenders can offer direct withdrawal, if that is convenient for the borrower. However, a lender that requires your bank account or a backdated check for the full amount is often preparing to pull money from your account whether you have it or not. This can send you into even more catastrophic debt, as the loan meant to alleviate your money problems will instead send your account into the red. The best way to protect yourself from harmful lending is to find a trustworthy loan officer. Here at First Savings Mortgage, we believe in building a relationship with our clients based on trust and a mutual desire for the borrower's success. Let us help you find a productive loan that meets your financial goals and means.
Please note, by refinancing your existing loan, your total finance charges may be higher over the life of the loan.