It's Financial Literacy Month. Here's How to Protect Yourself From Predatory Lenders
Authors: Ashley Maready
Source: The Motley Fool
Like many people, you may need to borrow money sooner or later. This could be to buy a home or a car, to start your own small business, or to get some work done on your house. Whatever the reason, you don't want to fall victim to a predatory lender. Predatory lenders charge excessive fees and trap you in expensive loans, and your finances and credit can suffer as a result. November is Financial Literacy Month, so let's take a look at a few ways to ensure you're dealing with an above-board lender.
Keep on top of your credit
For a lender, your credit score and credit report are some of the most useful bits of information about your financial life. You can likely see your credit score on the website or mobile app of your bank or credit card issuer.
If you already know the state of your credit before applying for a loan, you'll be able to target lenders that work well with people like you. If you know your credit is in great shape, you can target lenders that offer loans for good credit. If you have time to do so before borrowing, consider boosting your credit score to get a better deal on a loan.
Shop around and research lenders
If you're borrowing money, don't just go with the first lender you speak to about rates and terms. Make it a point to consider multiple lenders and even multiple types of loans. You never know which will offer you the best deal, and if you have a range of options to choose from, you're less likely to end up a victim of a predatory lender.
For example, if you're buying a home, don't just assume you have to choose a conventional mortgage. If you're a first-time home buyer, you might qualify for the First-Time Home Buyer Incentive, or if you're intending to buy in a rural area, you might be able to get a rural mortgage. And check with your regular bank but also consider the credit union in your neighborhood, as well as the online-only lender you've heard so much about.
And when it comes to vetting those lenders you're talking to, be sure to read reviews and even ask friends and family which ones they've had good (or bad) experiences with.
Check out the fine print and ask questions
When you pick a lender, read everything before you sign anything. Ask questions, and if you don't understand a term or a fee you're going to be charged, wait for it to be explained to you before you sign. In the case of, say, buying a car, if you've never been through the process before, you might want to bring a trusted (and experienced) friend or family member with you.
If the lender refuses to answer your questions, pressures you to sign the paperwork, or otherwise gives off any red flags, trust your gut. Don't sign, back away, and find a different lender.
See what fees you'll be charged on top of interest
You can certainly expect to pay interest on your loan because that's how the lender makes money on the deal. But what you need to be careful of is additional fees on top of the interest. For example, some lenders charge a loan origination fee to cover their costs in processing your loan application.
Another extra fee you might face is a prepayment penalty, which could be charged if you pay your loan off early. Thankfully, not all lenders charge these, and if the one you're considering does, you may be able to negotiate those fees.
Avoid payday lenders at all costs
If you're really in a pinch and need money sooner rather than later, you may consider going to a payday lender. Don't do this. Depending on where you live, payday loans may be illegal, which should tell you all you need to know about these predatory loans. Payday loans can trap borrowers in a cycle of debt that can be hard to break free from. Instead, can you borrow money from friends or family? Can you sell some belongings? Maybe your bank or credit union can offer you a small-dollar (or salary advance) loan.
If you're borrowing money, go in with your eyes wide open and be sure to shop around, research lenders, and avoid known predatory lenders like those offering payday loans. You might be paying a loan back for several years (or longer, in the case of a mortgage), so it's good to put in the time and effort to protect yourself from financial entities out to do you harm.
