Taking out a loan with a predatory lender can trap you in a destructive cycle of debt.

3 minute read

If you have good-to-excellent credit and a decent job, you’re more likely to get an auto, mortgage or personal loan with favorable terms and a lower interest rate. If your credit isn’t that great, however, you could find yourself in the crosshairs of a predatory lender that’s eager to exploit the fact that you can’t get a loan from your bank or another reputable lender.

In simple terms, a predatory lender lures you into a loan based on fraudulent, deceptive and unfair tactics. Predatory lending practices can include hidden fees, super-high interest rates and maybe even one huge payment you can’t afford at the end of the loan term.

Find out six red flags of a predatory lender and how to avoid taking out a loan you may regret.

1. No credit check

If you’re trying to get an auto, mortgage or personal loan, and the lender touts “no credit check” as one of the loan benefits, beware. Credible lenders run a credit check to find out your credit score, payment history and how much debt you already owe before loaning you money.

On the other hand, a predatory lender such as a title loan store won’t require a credit check because you will put up the title to your car as collateral. So, if you can’t pay off the loan or miss payments, the lender takes your car.

Find out: 6 Ways to Get a Personal Loan with Bad Credit

2. Unsolicited offers

Not every unsolicited loan offer you get in the mail is from a predatory lender, but you should be careful about applying for loans from an unsolicited source. Also proceed with caution when it comes to unsolicited offers to refinance your mortgage or another loan, warns the Kentucky Department of Financial Institutions (KFI).

“Beware of loan solicitations from telemarketers and door-to-door salesmen, as well as pitches for home equity loans related to unsolicited home improvement contracts,” says the KFI. “Beware of unsolicited offers to refinance your loan. Be certain the new loan provides a benefit to you, such as reduced interest rate or term, and not just a new fee for the lender.”

Find out: 4 Things That can Lower Your Credit Score Temporarily

3. High interest rates

Not everyone qualifies for the lowest interest rates available, but that doesn’t mean you should pay unfair interest rates targeting low-income consumers and/or those with poor credit. One of the most notorious types of predatory lenders is payday loan companies, which charge fees and often triple-digit interest rates.

There are also plenty of predatory mortgage lenders offering unreasonably high interest rates on loans to people who can’t get approved by lenders offering fair interest rates. So, even if you have bad credit, don’t sign up with the first lender who offers a loan at unreasonably high interest rates. Instead, shop around for more favorable terms.

Better yet, seek credit counseling at a nonprofit agency that can help you repair and improve your credit, pay off debt that is lowering your credit score and learn how to manage money better so you can get good loan terms in the future.

Find out: What is Credit Counseling and How Does it Work?

4. Balloon payments

Some predatory lenders focus your attention on the loan’s low monthly payment, which may seem like an amount you can afford. However, when you’re ready to close the loan, you suddenly learn the loan is actually a short-term loan with one large payment at the end of the term.

“Predatory lenders like balloon payments because they can tell you that your monthly payment is low,” according to the United States Attorney’s Office. The problem is that you may not be able to make the payment and will need to refinance.” Then you’re stuck with a new loan with all new fees and costs.

5. Loan flipping

If a mortgage lender pressures you to refinance your loan over and over, that’s called “loan flipping.” Refinancing can be a good move if you end up with a lower interest rate. However, refinancing again and again can keep you in debt longer and over your head.

“Before you refinance, make sure a new loan makes you better off. For instance, do not refinance a low interest loan into one with a higher interest rate,” advises the U.S. State’s Attorney’s Office, which suggests meeting with a housing counselor if your mortgage is with a loan-flipping lender.

6. Bait and switch schemes

Predatory lenders often promise one type of loan or a certain interest rate but then give you a different loan or a higher interest rate. Sometimes the higher interest rate won’t take effect until you’re already a few months into the loan, according to the Washington State Department of Financial Institutions (DFI).

Always review loan documents carefully, and if the interest rate, fees or other terms differ from what you were promised, don’t sign.

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About the Author

Deb Hipp

Deb Hipp

Deb Hipp is a full-time freelance writer based in Kansas City, Mo. Deb went from being unable to get approved for a credit card or loan 20 years ago to having excellent credit today and becoming a homeowner. Deb learned her lessons about money the hard way. Now she wants to share them to help you pay down debt, fix your credit and quit being broke all the time. Deb's personal finance and credit articles have been published at Credit Karma and The Huffington Post.

Published by Debt.com, LLC