Sunday, May 19, 2024

5 Warning Signs of Predatory Lenders To Watch Out For

When you’re in a tough situation and urgently require to borrow money, you may look for the easiest and quickest option available.

However, some lenders could take advantage of your situation by offering you a predatory loan which could leave you in a worse position than when you started.

Predatory lending is when lenders offer a loan that charges a borrower unfairly high interest rates or fees. These lenders often give loans to vulnerable people with the prior knowledge that the borrower may not be able to repay the loan. 

Typically, predatory lenders target specific groups of people like the elderly and those who need quick loans for emergencies. Predatory lenders do this as they know they will benefit from their borrowers defaulting on their loans.

So, you know what predatory lending is but the real question is how do you tell apart a predatory lender from a genuine one? We are here to help you with that.

In this article, we’ve put together 5 essential warning signs for predatory lenders that can help you avoid them in the future or even determine if you’re dealing with one right now.

Let’s dive in!

1) Pressure Tactics

Ideally, you should not feel pressured by your lender. Aggressive pressure tactics are often used by predatory lenders to push vulnerable borrowers into making quick decisions before they fully understand their options.

For example, saying offers are available for a short time i.e. “If you don’t act now someone else will take your spot!” or making you rush through the review of loan documents. 

If you ever feel pressured when talking with your lender, consider taking the documents home to give them a thorough read-through. This will help you avoid falling into a predatory lender’s trap and ensure that you’ve picked the right loan for you.

2) Confusing or Contradictory Loan Terms and Costs

Legally, all lenders need to present the costs of a loan upfront. However, predatory lenders often fudge the costs or make them difficult to understand to confuse naive or first-time borrowers. 

Never sign off on a loan unless you fully understand the terms and costs you are agreeing to. 

If you have any issues or questions regarding your loan terms and costs, make sure you ask your lender to clarify them. As a borrower, you need to know the actual cost of your loan and its Annual Percentage Rate (APR) with all upfront fees. 

If your lender is unable or unwilling to clarify any confusing or contradictory loan terms, they are likely a predatory lender.

3) No Creditworthiness Check

Lenders who don’t carry out a credit check or some form of financial assessment before offering a loan, are likely to be predatory lenders. In general, lenders examine your creditworthiness to ensure that you’ll be able to pay off your loan with on-time loan payments.

Comparatively, predatory lenders often do not look into their client’s debt history and how it was paid off. On top of this, they then pack on high rates alongside excessively high upfront costs to trap vulnerable clients in a cycle of debt.

If your lender doesn’t inquire about your credit score or assess your financial situation before offering a loan, do yourself a favour and avoid them. This will save you from encountering problems in the future.

4) High Rates and Fees

If the interest rate and fees appear to be high when reviewing the terms of your loans, you may need to look at other options. 

Shop around and see what fees, terms and interest rates are being offered by other lenders. Moreover, remember to compare the APRs when comparing multiple loans.

At times, predatory lenders use specific loan features to hike up the cost of borrowing. For example, negative amortisation – this will cause your loan balance to increase each month instead of shrink when you aren’t paying enough to cover the interest. Similarly, a lump-sum balloon payment due at the end of a loan could easily become unmanageable, especially on short-term loans. 

By watching out for exorbitant interest rates and other fees, you can stay vigilant and avoid predatory lenders. 

5) The Offer Seems Too Good to Be True

Lenders often put out advertisements declaring that they can help you easily settle all your debts, repair damaged credit or offer you incredible loans despite poor credit history. 

A few of these lenders may be legitimate. However, the majority are likely predatory lenders who aim to pressure you into expensive loans or purchasing services you don’t need. 

If loan advertising promises you fast cash, easy approval or unreasonably low interest rates, despite terrible credit, there’s likely a catch. That’s why you need to look for any hidden costs or high fees before signing anything.

To Wrap Up

Predatory lending has a far-reaching and often debilitating impact. Not only can predatory lending destroy the finances of individuals and families, but it could also undermine the stability of a community. 

As such, you need to do thorough research about your lenders before you put your trust in them and sign anything. If you come across any of the aforementioned warning signs, step back and carefully consider if you ought to borrow money from this lender. 

Now that you know how to recognise predatory lending, you can effectively work to avoid predatory lenders and have a safe borrowing experience.


Devendra Singh is a Digital Marketing expert and also a blogger. He has experience in the content marketing on different verticals and operates his guest blogging website