How to Identify Predatory Lenders

The only way to protect yourself from getting into a bad loan is to identify predatory lenders before you do business with them. While the government offers some protections to help you get out of bad loans, such as the Consumer Credit Protection Act, it is always cheaper for you to simply avoid getting into the loan in the first place. Predatory lenders are not always easy to identify, but there are a few factors to consider when you think you are getting a bad loan deal.

Terms are Not Disclosed

By law, lenders must disclose the terms of your loan contract up front. The terms are not only limits and payments but also any penalties and fees that may be associated with the loan. Prepayment fees, late payment fees and other penalties should be listed in the contract. The terms of default on the loan will be listed so you know exactly what it means to break the contract. You should also be able to find exact information on the process for default, seizing of assets and how and when the debt may go to collections.

Sub-Prime Interest Rate

Whenever you are quoted an interest rate below the national prime level, be concerned. A lender issuing either sub-prime or jumbo loans is acting out of the suggestions of the federal government, and you will not be able to receive a guarantee from the federal government. You may also be working with a risky lender. With adjustable rate loans, you should also examine the rate caps and schedules. Measure the highest rate cap and establish what the worst case scenario is for your payment, and how quickly you can get there. Time moves quickly with loans, so pay careful attention to how quickly the rate will jump.

Fast Approval Process

Lenders who approve your loan too quickly may be engaging in predatory lending. If you have been turned down by other lenders then quickly approved by a particular lender, a red flag should immediately go up. Mortgage loan scams often promise guaranteed and instant approval, but few prudent lending companies would ever promise this. Remember, if your lender goes bankrupt, you will be in a bad position. Your home could be sold off in the lender's bankruptcy case. Avoid signing up with a lender who appears to have bad financial practices and is taking on too much risk. 

Bad Consumer Ratings 

Consumer ratings and suggestions from friends are often the best tell of how safe a lender is. Online ratings are available for most major lenders. The Better Business Bureau or your local Chamber of Commerce should also be a resource of information about your lender. You can check with ratings companies like Standard & Poor's for more information on how your lender is rated on the national level. Some local lenders will not be listed with these large companies, which makes it more important to get a recommendation from another consumer who you trust.