How To Protect Yourself From Harmful Lending?
Have you heard of predatory lending practices? Such practices can drag you into a vicious circle of debt for years. Here’s our guide to predatory lending practices and how to safeguard yourself.
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We all face financial problems in our lives at some point. To get rid of the cash crunch, we often borrow money from a lender without considering some very essential factors. We don’t pay much heed to the credibility, past lending history, and reputation of the lender. As a result, we get into repayment issues that can be difficult.
Before you step out to get a loan, you need to know how to hedge yourself from harmful lending and dubious lenders. You need to be aware of the setbacks you might face taking a loan from such sources. Harmful lending may have a long-term financial impact on your life.
What is harmful lending?
Harmful lending, also known as predatory lending, is a practice that risks the money of a borrower. These kinds of practices benefit the lender illegitimately. With several clauses in the loan agreement, these lenders make it harder for the borrower to repay a debt.
These are high-cost loans with complicated borrowing terms. Common people do not usually understand these terms. These clauses include levying exorbitant penalties and seizure of assets. They also include charging interest rates much higher than the market rates. For these loans, the most critical part of borrowing is to choose the right moneylender.
These lenders often resort to unfair practices. For example, they won’t notify you during the tenure of the loan. They may offer you a bogus promotion, high-pressure deals, or even an unreasonable fee structure. The best way to steer clear of these lending schemes is to identify the early warning signals.
What are the key signs to identify harmful lending?
Certain money lenders will purposely plan to drag you into the vicious circle of debt for many years. To identify such deals and offers, here are some early warning signals:
- Extraordinarily high-interest rates, hidden costs, and fine prints
- Simple and quick application, loan disbursal process, etc.
- No checks on credit score or credit report
- High-risk secured lending
- Posing as credit repair loans.
Let’s find out more about these early signals.
Extraordinarily high-interest rates and hidden costs
Before you go for such loans, be sure to check the interest rate that the lender is charging. Also, ask and check for any hidden charges or frivolous costs.
According to a nationwide survey conducted by ACORN Canada, these loans may have an interest rate as high as 25% to 500%. By federal law, lenders cannot charge over 60% interest annually. These lenders are regulated provincially, thus are immune from federal law. This allows the lenders to get around the law and charge you higher interest.
Simple and quick application process
Before you sign on the documents, read and understand your loan documents thoroughly. Ensure you know what you are signing. You should also know lenders’ terms & conditions.
These predatory lenders tempt you with great customer services and offers. They will insist on a quick discussion and ask you to fill a short loan application. They will make the borrowing process simple, quick, and easy for you.
In case your lender is rushing you in to sign on the papers and asking you to skip the paperwork. Beware! You might feel convinced because of the ease and comfort. But the predatory lenders count on the customers who don’t understand the borrowing conditions. Consider it as an early warning sign if your lender is hurrying you up to sign the deal.
No credit check needed
If you find a lender who is promising easy lending with no credit check, it may seem like a boon. But these could be the biggest tip-offs for deceptive and unfair practices. The predatory lenders often put out advertisements highlighting no credit check to lure clients.
Ideally, as per federal law, all legitimate lenders do the regulatory credit check. This is to find out your current debts, creditworthiness and repaying capacity before issuing a loan. It allows them to find out if you will repay the money.
The predatory lenders know you are at risk and still approve the loan. This helps them to burden you with a high rate of interest. They may even charge you additional fees.
High-risk secured lending
The harmful lending practices allow you to borrow money against your assets, such as against your home or car. If you need money, but you have an existing loan, these predatory lenders come up with a new way. They allow you to merge your loans at a higher rate of interest than your existing loan.
These lenders ask you to take the loan against an asset as collateral. If you default on the loan because of a higher interest rate, the lender takes possession of the asset. High-risk secured lending can be immensely harmful. This is because these lenders can sue you for not paying the loan.
Posing as credit repair loans
Credit repair loans aim to improve your credit score. Credit repair loan is relatively less predatory or harmful. These loans help improve your overall credit score. They also pave the path for future loan eligibility. But these loans can also add up to your liabilities.
In a credit repair loan scheme, you must make regular payments, but you don’t receive the loan directly in your account. The lender usually releases your money at the end of the loan period or during the tenure of the loan. The lenders may charge you to transfer money into your account.
It is important to know about these indicators of harmful lending. You need to stay away from these practices and say no to such a deal. Before you take any loan, be sure about our repaying capacities.
Research some trusted lenders and read the loan documents carefully before you sign the loan agreement. There are various loans you should know more about. Read on ‘How many types of loans are there?’ to find out more.
