The lending jungle can be a dangerous place, especially if your low credit score has you at the bottom of the food chain.
Unlike those dang falcons, with their 800+ credit scores soaring high above the trees without a worry in the world, the rest of us have to constantly be on the lookout for predators. Specifically, predatory lenders. They can smell out a bad credit score from a distance of 20 miles and have fangs that can completely shred a bank account in under 10 seconds.
That’s all metaphorically speaking, of course. Real predatory lenders don’t have big fangs and lean haunches, they just have short-payment terms, sky-high interest rates, and super sketchy business practices.
Here’s your field guide to understanding if you might be dealing with a predatory lender.
They don’t do a credit check.
If you have bad credit and need a loan, you might think you should avoid lenders who perform credit checks. But a lender who doesn’t look for red flags (like troubled credit history) is, in itself, a red flag. The right bad credit loan can be a handy tool in a time of crisis, but a sketchy no credit check loan is more likely to land you in even more financial trouble than you were already in.
If the lender isn’t concerned about your previous payment history, there’s a good chance that their fees and interest are so high and their payment terms so restrictive that the lender knows they can make more money off you not being able to pay them back. Their business model depends on continuously paying interest and extending the loan instead of paying it off in a reasonable time.
If you are going to a lender who uses credit checks, try and find one who uses a soft credit check. Unlike hard credit checks, these will not have a negative impact on your credit score, which, if you’re reading this, you probably don’t need to have further damaged.
Watch out for “cash advance loans.”
A cash advance is money you get from using your credit card. You can take out cash within your credit limit, but the interest rates are higher than with normal use and there’s no grace period, so the interest starts accumulating immediately.
However, if you see a lender advertising “cash advance loans” they’re probably just offering a payday loan or some other kind of sketchy predatory loan. Cash advances aren’t great, but they are likely better than a lot of more dangerous alternatives. If you’re not using your credit card to get it, it isn’t a cash advance loan.
Look out for short payment terms.
Payday loans tend to have very short payment terms. Around two weeks, on average. And at the end of that time, you’ll have to pay back the whole loan, plus interest and fees. That’s not a lot of wiggle room.
If you’re totally sure you’ll be able to pay it back in time, then there’s no problem. But even then: just because you plan on having the money to pay the loan back doesn’t mean you will have it.
You might be safer if you can find an installment loan that can provide you a payment plan that fits within your budget. Ideally, they won’t have a penalty for prepayment either. That way, if you are able to pay it all back within two weeks, you won’t have to pay nearly as much interest.
Don’t give them your car.
Title loans are a lot like payday loans, except they require your car as collateral. You get all the high interest rates and short payment terms with the added fun of losing your car if you can’t pay it.
And it’s not like the chances are super remote either: One study from the Consumer Financial Protection Bureau found that one in five title loan customers gets their vehicle repossessed! That number is … high.
Skip the title loan and stick with an unsecured personal loan from a more reputable bad credit lender. Not being able to pay back a loan sucks, losing your car over it sucks way more.
Read the reviews.
When you’re looking for a lender, take some time to read their reviews online. This should give you some idea about the lender’s business practices. And this goes for all kinds of lenders, whether they’re a storefront down the street or an internet-based lender providing online loans.
User reviews will give you an idea of how a lender treats their customers. If you only read a company’s advertisements, you’ll always come away thinking they’re the bee’s knees. User reviews will give you a much clearer picture of what the company’s like. Maybe they’re not the bee’s knees at all. Maybe they’re something much worse, like the bee’s, um, armpit or something.
Using the mistakes or successes of other people is a great way to avoid mistakes and achieve successes of your own. You should still read the actual terms of any agreement before you sign it, but reviews can be a great source of supplementary information.
They have bad customer service.
Reading reviews should help you get a sense of if a lender has responsive customer service. Ideally, you want a number you can call with a real person on the other end who can help you immediately if you think you’re going to have trouble making your payments.
A good lender makes money from customers that can actually afford to pay them back, and thus they should want to help you do so if you’re struggling. It should be a mutually beneficial relationship.
A predatory lender just wants to (metaphorically) swallow your finances whole. Once you’re able to spot these shady players, you can avoid them and keep working on building up your credit. Someday, you’ll be one of those falcons, soaring through the sky and taking out falcon-only credit card with totally sick falcon rewards.
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The information contained herein is provided for free and is to be used for educational and informational purposes only. We are not a credit repair organization as defined under federal or state law and we do not provide "credit repair" services or advice or assistance regarding "rebuilding" or "improving" your credit. Articles provided in connection with this blog are general in nature, provided for informational purposes only and are not a substitute for individualized professional advice. We make no representation that we will improve or attempt to improve your credit record, history, or rating through the use of the resources provided through the OppLoans blog.