How it happens
Imagine you’ve just found yourself in a tight spot financially. Maybe you don’t have to imagine. Your only form of transportation between home and work broke down, or you had to pay out of pocket for a round of expensive medical procedures, or a risky investment fell through. Either way, you need some money to get through the month – and you need it fast.
You start looking through the paper or snooping around the internet, and you find an ad for a low-interest personal loan. You drive to their offices in a low-rent part of town; something seems fishy. After walking through the door, you’re greeted by a friendly man with a big smile and a helpful attitude. They can’t offer exactly the deal you saw in the advertisement, he tells you, but if you’ll take a seat he can certainly help you out of your financial jam – in fact, they can loan you more than you’re asking for.
After rushing through the paperwork and leaving with a sense of foreboding, you go about your business and start trying to get your life back on track. Then you start getting bills for your loan repayment.
At first everything seems okay, if a little pricier than you anticipated. But eventually the payments become much, much higher than you expected, and the terms of the loan seem to be completely different than what you agreed upon. Instead of the low interest rate you were promised, you’re now paying more than twice that. On examining the fine print, you also find heaps of hidden fees that were never mentioned by the nice man at the office. You borrowed more than you could easily afford, so these extra expenses send you into a financial tailspin that takes years to climb out of.
When you try to contact the man you signed the paperwork with, he’s always out to lunch or with another client. You ask to speak with someone else, but the receptionist tells you he’s the only one qualified to discuss your account. When you finally storm into the offices demanding an explanation, he smugly informs you of your worst fears – there’s been no mistake, and by signing the paperwork you’re locked into a loan you can’t afford. You’ve been had.
Hopefully, that sounds like a financial horror story that could never happen to you. If not, you already know about the dangers of predatory lending. Read ahead for a breakdown of what predatory lenders are, how they operate and how to avoid falling for their traps.
What is a predatory lender?
A predatory lender is one who aims to deceive borrowers by failing to properly disclose fees, interest rates and other important details. Their goal is to get you signed up for a loan product before explaining to you how it fully works, usually with misdirection and false promises.
Many have been called payday lenders or title loan companies predatory lenders, because their interest rates often exceed 100% APR, and they charge a variety of fees to unsuspecting customers. Most require that consumers sign long, complicated contracts that don’t clearly lay out what you’ll pay each month and how quickly you’ll pay it off.
Many mortgage lenders got into hot water after the Great Recession because they were approving mortgages for customers who were unable to handle the monthly payments. This fallout brought the predatory lending issue to the forefront of the national conversation, leading to tighter regulations in the lending sector.
Common signs of predatory lenders
Ever heard those car commercials where a dealer is screaming into the camera, “Bad credit? No credit? No problem!” While those dealers aren’t necessarily predatory lenders, they are luring in customers that they know will have trouble finding loans elsewhere. Your lender should always care about your credit score. The better your credit, the better financing offer you can get.
Even if you think you’re getting a good deal on a loan, always compare it to other lenders. You never want to accept the first financing offer you see. For example, if you’re shopping for a new car, contact credit unions and banks beforehand to see what their deals are before you talk to the financing department at the dealership.
If a lender is trying to get you to borrow more than you want, that should bring up some red flags. Lenders make a living off the amount you borrow. The more they lend you, the more money they make, so it’s pretty easy to see why a below-board lending operation would try to convince customers to borrow irresponsibly.
One tactic that lenders will use is to advertise a low interest rate that seems unheard of, but when you arrive, the deal is no longer available. Then, they’ll offer you another deal so that you didn’t waste your time coming in. Predatory lenders also don’t take the time to explain deals, because their goal is to get you to sign up quickly and without reading the fine print.
“You should be suspicious of a lender who presents you with papers to sign and brushes off your attempt to read it carefully, citing complexity or lack of time,” said consumer lawyer Jay S. Fleischman of Consumer Help Central. “So many of my clients have come to me with stories of sitting at a closing table and being told, ‘Oh, don’t worry about the numbers – they’re just banking formalities.’”
Some lenders will also change the terms of the deal once the final contract is ready. If you notice that the loan you’re about to sign is different than the one you agreed to, put down the pen and walk away. Any lender who does that is not someone you want to be in business with.
If you find yourself becoming increasingly suspicious of a lender as you go through the process, turn around and walk out immediately. There are plenty of reputable lenders available who want your business, so even a hint of suspicion should be enough to take your business elsewhere. Don’t try and argue about the terms or reason with the representative. These are well-trained snake oil salesmen who make their money off of sweet talk and false promises – don’t give them a chance to put you under their charm.
How to find a trustworthy lender
When you meet with a new lender about a loan product, don’t be hesitant to ask as many questions as possible. Ask them to explain every fee including interest, service, repayment and other fees. A legitimate bank will be prepared to answer and won’t try to deflect with a clever response.
Don’t talk to one lender only. Compare rates, fees and customer service across multiple companies. Not only will this allow you to find a better deal, but it will give you a clearer sense of what’s normal within the lending industry. All reputable lenders will have discrepancies, but their rates and fees should generally fall within a similar range.
If you’re truly having trouble comprehending the terms of a loan, talk to a consumer advocate or lawyer who can explain what it all means. Low-cost legal or financial help is available in most cities, where you can find someone who will look over the document for free.
Remember, predatory lenders don’t want you to spend time looking over the loan documents. They might tell you that this deal is going away soon, so if you wait too long, it won’t be available. They want you to sign up for the loan as soon as possible, so don’t fall for their high-pressured sales tactics.
Keep in mind that they need you more than you need them. If you’re truly a great applicant, you can find good deals through a variety of lenders.
“Beware of lenders who don’t take the time to explain the terms of the loan in a way you can understand,” Fleischman said. “Predatory lenders rely on a borrower’s lack of information to maximize their own bottom line and avoid questions.”
Check out credit unions
Credit unions operate as a non-profit and therefore they can charge lower fees and interest rates than many banks. If you have a local credit union near you, talk to them if you’re looking for a mortgage, personal loan or auto loan. Most credit unions have good reputations for treating customers well. If you’re unsure, talk to someone you know who can recommend a quality credit union.
The bottom line
Predatory lending is pretty easily avoidable, as long as you’re aware that it exists. It doesn’t take much more than vetting the lenders you approach, reading the fine print, borrowing a responsible amount and asking any questions you may have early in the process. If you do those things, you’ll be able to spot a predatory lender from a mile away.
Do your research, compare rates and ask around to find a reputable lender. There are plenty of above-board loan companies out there who want your business – all you have to do is find them.