Best Ways to Avoid Predatory Lenders

Loan

Predatory loans refer to high-cost loans that are disguised as legitimate and even affordable. Predatory lenders come in many shapes. All of them routinely lie to borrowers or at least exaggerate the “benefits” of the loan. They may tell you that a loan would be very easy to pay back when in reality you will be stuck with an atrociously high APR.

Unfortunately, the current regulatory system is not sufficient to curtail all types of predatory lending practices out there. All too often, unsuspecting borrowers become victims of predatory lending practices and debt traps that come with them. If you are thinking about taking out a loan, you should be vigilant to avoid the loan sharks. Here are some ways you can accomplish that:

Demand a Loan Estimate

Never borrow money without knowing the full cost of the loan. This is usually spelled out in a “loan estimate” that should be available to you once you apply for a loan. A loan estimate is usually three pages long and specifies the interest rate, how much you have to repay each month, and the total cost of the loan by the time it’s repaid.

Ideally, the loan estimate should include information on penalties, grace periods, and the circumstances under which the interest rate may change. You can easily obtain a loan estimate from any legitimate lender. If a lender is reluctant to provide a loan estimate, or only provides partial information, then that’s a major red flag for a predatory lender.

Check All Your Loan Options

It can be difficult to tell if a loan is outrageously expensive if you are only looking at a single option. Applying for loans with different lenders will help you spot predatory lenders easily. In other words, shop around and check out as many options as you can. You can do this individually or use an online service like Loanable that will connect you with multiple lenders at once. Compare a variety of options to choose a loan that is best for you and avoid spurious practices. However, remember to use encryption tools such as premium VPNs when sending payment information online. Digital criminals and sketchy free VPN providers are no less dangerous than predatory lenders.

Understand the Time Period for Paying Back a Loan

Predatory lenders often design loans to keep the borrower near perpetually in debt. When you repay a loan, your monthly payments should include balance plus interest. If you are not paying down the balance, then your loan is not getting reduced with each payment. Predatory lenders structure repayments so that you only pay interest on a monthly basis.

Check the loan payment schedule to avoid this particular trap. The loan must come with a clear time period for complete repayment.

Be Aware of Ballooning Monthly Payments

Be cautious of loans where the initial monthly payments are small. After several months, the monthly payments will “balloon” into larger amounts. These types of payment plans obscure the actual cost of the loan. Predatory lenders use ballooning loans to put borrowers in a situation where they have to refinance the loan at the end, which means the borrower is only sinking deeper into debt.

Watch Out for Mandatory Arbitration

Mandatory arbitration is a legal clause you will find in your loan contract. It essentially forces you into arbitration in case of a legal dispute. When you sue a lender, your case is going to a court before a judge. Arbitration refers to an out-of-court dispute resolution practices where an arbitrator oversees the case.

An arbitrator isn’t necessarily a judge. It could be a private attorney who happens to know the lender. Mandatory arbitration will prevent you from suing a predatory lender in a court where you can make a good case under the current law. Therefore, don’t just sign a loan contract that demands mandatory arbitration.

Predatory lenders cleverly use deceptive tactics and will lie to your face to get you to borrow money from them. You shouldn’t wait till there is a massive bill to understand that you have become a victim. Prevention is crucial for avoiding long-term financial trouble loan sharks bring. Use the above tips and be smart before you borrow money again.

Anum

Anum Yoon is the founder and editor of Current on Currency. She loves all things personal finance, which is why you'll find her work all over the PF blogosphere.

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