Whether you're taking out a mortgage, financing a car or borrowing money for a personal loan, you'll want a lender you can trust. The process should feel transparent and relatively straightforward. If not, it could be a sign that you're working with a predatory lender. That might be a licensed lender that doesn't adhere to industry best practices—or a scammer who's trying to take advantage of you. Either way, here are eight lender red flags to look out for.
1. Not Doing a Credit Check
You can expect lenders to pull your credit report when you apply for a new loan. They do this to see how you've managed your credit in the past. Having a low debt-to-income ratio and a history of on-time payments can suggest that you're a creditworthy borrower—and that could help you qualify for a lower interest rate. On the flip side, a poor credit score could have a negative effect on your eligibility.
Some predatory lenders target borrowers with bad credit, promising personal loans with no credit check. Payday loans, for example, typically have outrageous interest rates and high fees that can actually worsen your financial health.
2. Rushing You Through the Process
A reputable lender shouldn't have a problem with you taking your time to review the loan agreement. If you feel pressured to sign quickly, that's a red flag that something shady might be going on. Lenders may try to rush you by:
- Dangling a low introductory interest rate
- Offering to waive certain fees if you lock in your deal right away
- Claiming that inventory is limited and you need to act quickly, which may be the case if you're financing a home or car
In some cases, a lender might simply encourage you to skip over the fine print and sign on the dotted line quickly. This false sense of urgency could cloud your judgment and cause you to enter into an agreement that favors the lender—not you.
3. Not Honoring Advertised Rates or Terms
You might come across an advertised deal, like a super-low price on a new car, that draws you into a lender's office. But once you're there, you might learn that price is reserved for certain borrowers or limited to specific models. At this point, a shifty lender might use a bait-and-switch tactic to pressure you into financing a different purchase. It's important to ask yourself if you want to work with a lender that used deceptive advertising to lure you in initially. It could be a sneak peek of what's to come.
4. Charging Higher-Than-Average Interest Rates
Every borrower wants to save money. Lenders know this, and some will deliberately hook people in by making big promises. They might do this by offering:
- A low introductory interest rate that eventually skyrockets
- Too-good-to-be-true prices in exchange for high interest rates
Either tactic could trick you into paying more in interest than you originally planned. This is why it's important to read the terms and conditions carefully before taking out a loan. Get clear on the interest rate and how much you'll ultimately pay over the life of the loan.
5. Sneaking in Hidden Fees
It's possible for a loan offer to look great on the surface. You might be offered a reasonable sales price, competitive interest rate and manageable monthly payment—but hidden fees could wipe out some or all of your savings. These fees could include:
- Loan application fees
- Origination fees
- Late payment fees
- Prepayment penalties
If you're buying a home, mortgage fees come with the territory—but they can vary from one lender to the next. That includes fees you pay for mortgage points and mortgage insurance.
6. Not Being Transparent
Be wary of lenders that are vague when it comes to their:
- Pricing
- Interest rates
- Fee structure
- Repayment terms
These details should be made clear from the get-go. If you ask specific questions, you should get a direct response within a reasonable amount of time. A lack of transparency is a red flag that you might be working with an untrustworthy lender.
7. Saying One Thing and Doing Another
If things go well, you'll come to a loan agreement that feels right for your budget. Just make sure that what you've been promised is reflected in the paperwork.
For example, you may have negotiated a lower interest rate or convinced the lender to waive certain fees—but errors could still be hiding in the final loan agreement, whether that's deliberate or an honest mistake. It's wise to review your contract line for line before signing. Doing so can help you catch errors that could cost you money in the long run.
8. Asking You to Make False Statements or Omit Key Information
When filling out a loan application, you'll likely be asked to disclose your income, assets, debts and other financial details. Be suspicious of lending professionals who encourage you to omit certain information or make false or misleading statements—that's a clear warning that the lender isn't trustworthy. They might tell you to:
- Leave certain sections of the loan application blank
- Inflate your income
You could wind up with a loan you can't afford. Lying on your loan application could also have serious consequences, including jail time.
How to Find a Loan With Good Terms
Here are some simple steps to help you find a loan with good terms from a reputable lender:
- Check your credit score and take steps to improve your credit if necessary. A strong credit score can help you qualify for a competitive interest rate.
- Determine how much money you need to borrow. Be realistic about this amount and calculate how much you can reasonably afford to pay back each month.
- Get prequalified with multiple lenders.
- Compare rates, terms and monthly payment amounts.
- Research your top lenders, checking their online reviews and Better Business Bureau ratings.
- Choose one and complete your loan application.
- If approved, you'll receive funding.
The Bottom Line
If you're looking to take out a loan, you'll want to go with a trustworthy lender that has a solid reputation. Knowing about potential red flags could help you avoid getting caught in a scam. The goal is to get a loan offer that meets your standards and is aligned with your budget. In the meantime, you can get your FICO® Score☉ and credit report for free from Experian to see where you stand.