Predatory Lending
Predatory lending practices have long caused more harm than good for those looking to obtain funding or capital for their businesses. Some of the more commonly known types of predatory loans are subprime mortgages or payday loans. However, new tactics are being used every day to deceive borrowers into terms they cannot meet, and small businesses are not immune.
Christine Buckley, Loan Readiness Center Director, discusses a few red flags to be aware of: “Communication is key. Watch out for companies where you don’t speak with a human or open communication is not readily available with a person versus an application or screen.” In addition, she states, “understand the terms and watch out for predatory practices such as balloon payments, hidden fees, and higher interest rates.” As an entrepreneur or small business owner, whether in the start up phase or established and looking towards lending to grow your business, there are a few things to watch out for.
Quick Approvals & Lack of Communication
In today’s fast-paced landscape, quick loan approvals can appear as a great solution, especially for those in urgent need. It is essential to be aware of the potential issues with fast-approval loans, as they can often be a form of predatory lending.
One of the most significant risks associated with quick loan approvals is the lack of transparent communication between lenders and borrowers. Without clear terms, interest rates, and fees disclosed upfront and communicated both clearly and comprehensibly, borrowers may be left with uncertainty as to what the payback of their loan entails. Borrowers may face unexpected costs and high-interest rates, making re-payment challenging, and trapping them in a vicious cycle of debt with hidden fees.
In addition, the rapid approval process often means that lenders have not adequately assessed a borrower’s financial capability to repay the loan, leading to long-term unsustainable debt. For small business owners and entrepreneurs seeking quick-approval loans, it’s crucial to do research. Exercise caution and choose reputable lenders that focus on transparency and fair lending practices, and, as a consumer, thoroughly read and understand all loan documents to avoid falling into a debt trap.
Balloon Payments
Another predatory lending tactic to be aware of are balloon payments. Though they might look appealing at first due to a lower monthly payment and immediate access to funds, they come with substantial risks that borrowers should be aware of. A balloon payment requires borrowers to make a large lump-sum payment at the end of the loan term. This can become very financially burdensome and difficult to prepare for or manage. This type of payment structure often masks the true cost of the loan, making it easy for lenders to take advantage of unsuspecting borrowers with hidden fees, high-interest rates, and unfavorable terms.
If borrowers are unable to make the balloon payment when due, they risk defaulting on the loan. This will lead to additional fees, harmful damage to credit scores- making future lending options more difficult to attain, and potential loss of collateral, all of which could result in a small business suffering unnecessarily, or at worst, closing down. It’s crucial for small business owners to fully understand the implications of balloon payments and carefully review all loan agreements to avoid more debt and predatory practices.
Excessive and Hidden Fees Including Higher Interest Rates
Predatory lenders often lean on exploitative tactics like hidden fees and high-interest rates to take advantage of small business owners. These lenders may advertise attractive loan terms upfront, with the real costs disguised in the fine print. This makes it challenging for borrowers to identify the full extent of charges related to the loan. Hidden fees can include processing fees, origination fees, predatory late payment and penalty fees, all of which can significantly increase the overall cost of the loan. Additionally, high- interest rates further the financial burden, making repayment more challenging for borrowers.
This lack of transparency and fair lending practices allows predatory lenders to take advantage of individuals in vulnerable financial situations. As a small business owner, entrepreneur, or consumer interested in a loan, it is imperative to protect yourself from becoming a victim of predatory lending practices. It is essential to carefully read the entire contents of the loan packet and fully understand all loan terms, including any and all fees, as well as interest rates, and ask questions. By being informed and vigilant, small business owners and entrepreneurs can make smarter financial decisions that will lead to long-term financial stability.
Read The Fine Print!
Always read the fine print in any contract you are considering. Reading and understanding the fine print of a loan packet is crucial to avoiding predatory lending practices, as well as fully understanding the terms of the loan. While the main terms may seem fair, thoroughly review the details in the fine print, as they often hide extra fees, high-interest rates, and other unfavorable terms and conditions that can result in the loan repayment being much more expensive than it originally seems. The negative terms could potentially significantly impact financial well-being.
Hidden details can include fees processing fees, origination fees for starting the loan, late payment fees, and early pay-off fees. With higher interest rates further compounding the hidden fees and penalties, the additional amounts of predatory loans add up. This makes repayment very challenging and can quickly turn into an out-of-control cycle of debt, further exacerbating the financial issues and adding undue stress.
To avoid predatory lending decisions and make informed decisions, careful review of all sections of the loan packet is necessary. Review all fine print, ask the lender questions for clarity, and make informed decisions that align with financial goals and capacity to pay back the loan, without increasing financial risk. Being vigilant and knowledgeable about a small business loan can help avoid costly mistakes and protect the financial future of the business.
Protect Yourself
As a small business owner or entrepreneur, protecting yourself and business in today’s complex financial and economic outlook is vital, especially with the prevalence of predatory lending options. One of the most important pieces of information to understand and protect yourself with, as a consumer, is the Truth in Lending Act (TILA). This federal law mandates that lenders disclose all terms, conditions, and costs associated with a loan, in a clear and transparent manner. Small businesses should familiarize themselves with TILA requirements to ensure that they are fully knowledgeable about the true costs of borrowing.
Furthermore, it’s important to research and compare multiple loan options, again, read all loan agreements carefully, and ask questions to clarify misunderstandings. Look for reputable lenders who prioritize transparency, fair lending practices, and open communication. Taking those proactive steps can help protect you as the consumer, and your business from predatory schemes, and help make confident, informed decisions that will support financial health and business success.
Loan Readiness Center at Business Impact NW
At Business Impact NW, we are committed to supporting entrepreneurs and small businesses at every step of their journey, including funding. The Loan Readiness Center provides tailored advice and business loan training for entrepreneurs to access funding that is needed to start or grow businesses. In addition to business coaching, the LRC provides financial coach, financial planning, credit counseling, loan application preparation, and training to assist with fully understanding every aspect of the loan process.
“Most Lenders don’t have coaching or technical assistance part to them, but the LRC does, so we as a lender, don’t have to just say no and we can’t help you if a business is just starting out. They come to us and we can help them prepare for lending.”
The LRC’s goal is to positively impact communities, small businesses, and entrepreneurs by facilitating and assisting with funding, increasing access to loans and capital, maximize jobs, and reinforce growth, profit, and value of businesses. Working directly with the LRC, small business owners will understand commercial lending thoroughly. They will receive assistance in identifying the best funding options, preparing, and applying for loans, as well as skills to help best manage their business’ finances. Resource referrals within the community are another benefit of the LRC. As Business Impact NW’s overall goal is to support small businesses in the best way possible, referrals are made based on specific needs. The LRC is here to help small businesses and entrepreneurs navigate healthy financial decisions that correlate to successful and sustainable growth.
For more information about supporting your individual or business needs with the Loan Readiness Center (LRC), click here.
For more information on all of Business Impact NW’s programs available for entrepreneurs or small business owners, click here.
About the author
Emma Seymour is a Communications and Public Relations professional specializing in storytelling, relationship building, and content development. A military spouse and former small business owner, she advocates for veterans, transitioning service members, and their spouses, and has delivered keynote speeches on workforce development, military programs, and childhood trauma.