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Could I be a Victim of Predatory Lending and Not Know It?

Unfortunately, yes. Small businesses are a major target and can easily fall into the traps set by predatory lenders. There they find a trail of excessive and disguised fees, inflated interest rates and other practices that make it next-to-impossible to repay their debt. These abusive lending practices make loans easy to get – and difficult to pay back. Some of the more common predatory lending tactics are:

  • Bait and switch – the lender in these scenarios often jack up the interest rate to unaffordable levels months or even years into your loan. By having inadequate disclosures, the victims aren’t aware of the true cost, risk or terms of the loan.

  • Loan packing – this is when your loan comes loaded with charges that you didn’t ask for or don’t need. You may also be led to believe that you need these services in order to qualify for the loan, which is not true in almost all cases.

  • Hidden balloon payments – your payments will start low, sometimes only covering the monthly interest, so that the principal of the loan is never addressed until the last payment. While balloon payments are common, make sure you are aware of all details before you close on the loan.

  • Asset-based lending – in a typical loan situation, the lender will look at your income. However, in this situation, you might be offered a larger loan based on your assets, such as the equity in your home. These payments may be more than you can afford, resulting in the foreclosure of your home. This is referred to as equity stripping.

  • Loan flipping – be wary if the lender encourages you to keep refinancing your loan over and over again. Each time you do, they may be collecting a fresh set of fees while each new loan continues to be just as unaffordable as the last one.

How do you avoid working with unscrupulous lenders like these? Here are two red flags:

  • They say bad credit doesn’t matter. That should be your first hint that you’ll be paying excessive interest rates and fees. Lenders can’t otherwise afford the risk of making the loan.

  • They’re not concerned with how you’ll pay them back. That’s because they know this likely won’t happen. Unprincipled lenders will take payments until you default, leaving you in worse financial condition than when you started.

The bottom line? The more cash-strapped that the business owner appears to be, the more the predatory lender will feast. If it sounds too good to be true, it probably is. Play it safe, ask about repayment terms and work with small business lenders who have your best interests at heart.

Also See:

What financing options are available to small business owners?

Five things to consider when evaluating a bank