A personal loan can be a life-saver when you need to make a big purchase, or when faced with a severe financial setback. However, you have to be very careful with who you trust when you take out a loan so that you don’t become a victim of predatory lending.

Predatory lending happens when a loan benefits the lender way more than it benefits the borrower. Lenders get away with it through a variety of tactics so look out for these signs that a lender might predatory.

High Fees

It’s always important to watch out for extremely high fees and interest rates on your loan. The higher the fees and APR, the more expensive the loan will be in the long run, and the harder it will be to pay it back. If you are worried that you won’t be able to get a better deal with your current credit score, make sure to do your research on what kind of interest rates are typical and safe for your current situation.

An honest lender will want you to make your payments on time. If your lender is not concerned with your ability to repay the loan, he or she might be taking advantage of you through the interest that you pay.

Add-On Services and Costs

Many predatory lenders will try to squeeze out extra money from you by including add-on services and costs to your plan. Watch out for extra fees like credit insurance or unnecessary roadside assistance fees for a car loan. These might seem like nice additions, but you probably won’t need them

For your average personal loan, there is usually no reason for adding on this kind of “insurance” for an additional cost. If it seems like the lender you are working with is trying to sneak in extra costs, look elsewhere for someone who will put your best interests first.

High-Risk Secured Lending

Secured lending is when a borrower must use assets as collateral in order for a lender to take the loan. For example, if I needed a loan to buy a house, the lender might use the house as collateral in a secured loan. This means that if I default on the loan, then the lender could take the house away. 

If the lender is over-eager to secure the loan that they are offering you, it may be a sign that they are more interested in taking your collateral than having you pay back your loan. 

Won’t Answer Questions

The lender skirting around your questions and not giving you straight answers is a strong sign that there’s something shady going on. Find a lender who will be upfront and honest in answering your questions. If they’re acting like there is something to hide, there probably is.

Surprise Paperwork

Never sign anything that you have not read thoroughly. If someone is sliding paperwork in front of you without explaining what it is or giving you a chance to review it yourself, there is likely something in that contract that they don’t want you to read carefully. Taking out a loan is a serious decision, and you should go into it with eyes wide open. Your lender knows this, so make sure the one you are dealing with is upfront and clear about the terms of the loan.

Also, be aware that blanks in a document are never a good sign. If you sign a document with blanks spaces for dollar amounts or interest rates, the lender can go back through and fill in the blanks with whatever they want. Always make sure the terms are spelled out and that there are no blanks in the documents you sign.

Penalties for Paying Off Early

One of the best things you can do to save yourself money when paying off your loan is to pay it off as early as you can. However, some predatory lenders actually penalize you by making you pay more if you try to pay off your loan early. Any penalty for early payment on a loan may be a sign that that loan is predatory. 

Asking You to Lie

You should never, ever lie on a loan application. Ever. Any lender who encourages you or asks you to lie when applying for a loan cannot be trusted. Do not agree to lie, and do not give them any of your business if they ask you to.

Bad Online Reputation

What have other people said about the creditor you are considering taking a loan from? Do they have good online reviews? Some loan agencies have terrible online reviews based on the terrible experiences of others. In contrast, many companies like Lift Credit can prove their honesty and professionalism with the reviews of previous customers. Be sure to do a bit of your own investigating before working with a lender.

Too-Good-to-Be-True Offers

If it looks too good to be true, it probably is. Trust your instincts if you have a bad feeling about a lender. Do your research and consider asking a trusted friend to verify that you are correctly interpreting all of the terms of a loan before working with someone. 

Conclusion

As a recap, here are the signs of predatory lending that you should watch out for:

  • High Fees
  • Add-On Services and Costs
  • High-Risk Secured Lending
  • Won’t Answer Questions
  • Surprise Paperwork
  • Penalties for Paying Off Early
  • Asking You to Lie
  • Bad Online Reputation
  • Too-Good-to-Be-True Offers

Predatory lending can happen to anybody, but if you keep an eye out for these practices, you’ll be able to distinguish between good lending and predatory lending. When you’re dealing with something as important as your finances, you don’t want to fall prey to people who do not have your best interests at heart.