how to know the difference between a good loan and a bad one
5 ways to stop a scammer, or ‘fake lender’
The circumstances that might require someone to take on a loan can be exciting, or be challenging. But a good loan is never abusive.
Predatory lenders are often just that – abusive. Think triple-digital annual interest rates, or pressuring someone to sign a loan when they don't understand the confusing terms.
There’s a reason the National Consumer Law Center calls many of these entities, including payday lenders, “rent-a-banks.”1 They often target consumers who are working hard to climb out of debt with bank-like loan offers that appear very easy to qualify. Yet in time, these loans might charge unexpected fees and increasingly high-interest rates.
In the end, the debt one had hoped to pay off is compounded.
Many predatory lenders reveal the same telltale signs
Fortunately for consumers, bad loans can be relatively easy to spot. But it takes acknowledging that what sounds too good to be true may, in fact, be too good to be true. The right loan might take a little more preparation, but it will pay off in the end.
Following are five big warning signs from the American Bankers Association2 and the Better Business Bureau.3
The lender pressures you. Be suspicious of any potential lenders that come on too strong – especially if they require the borrower to apply over the phone and pay up-front fees. Signs of a scam or bad loan include next-day approvals and “guaranteed” low-interest loans.
The terms are amazingly good. A predatory lender might promise a good loan despite bad or no credit, with few details of why it would take on the risk. Get the fine print and scan it for conditions such as balloon payments and prepayment penalties. Often, these lenders reach under-pressure consumers via unsolicited advertisements or telemarketing – even home contractors have been known to canvas areas and offer quick-approval loans.
The loan terms don’t make sense or are unclear. Never forget that the borrower is in control. If the terms, conditions, and/or fees don’t add up, it’s probably for a reason. The borrower is entitled to an easy-to-follow explanation of all loan details. Do not sign anything that does not align with what was agreed to verbally, and never, never sign a blank form.
The loan includes insurance. Some lenders will add an unnecessary insurance policy to the loan, such as disability, default, or life insurance, without telling the borrower it is optional. Any paperwork should spell this out, with the cost of the policy and the length of time it would be valid.
They discourage an independent reference check. Predatory lenders can be charming, but remember, you don’t know them. Check references and compare the terms with those of other lenders. Ask for input from trusted and knowledgeable sources, including a bank, accountant, or family friend who has experience with loans. The local Better Business Bureau will share complaints about potential lenders.
And don’t forget, the law is on the consumer’s side. For example, under the Truth in Lending Act, borrowers of home equity loans, lines of credit, or refinancing transactions have the legal right to change their minds within three days of signing most contracts.4, 5
Where to report a suspected predatory lender
If a lender offers you, or someone you know, a bad loan, then the resources below can help:
- The Federal Trade Commission offers assistance through 1-877-FTC-HELP (382-4357) and takes complaints online.
- The American Bankers Association provides tips on detecting specific features of predatory loans.
- The Consumer Financial Protection Bureau, a government agency that ensures banks, lenders, and other financial entities treat consumers fairly, takes online complaints.
- The Center for Responsible Lending provides regular updates on predatory practices and invites consumers to connect with an expert.
- The FDIC website includes a sample of a predatory loan offer.