Before submitting an application for a small business loan, it is important to know the risks involved. Understanding the red flags of loans will help you navigate these risks and choose the loan that works best for your business. The five major signs of bad or predatory loans are listed below:
1. Guaranteed Approval
As lenders take on considerable risk when disbursing loans, guaranteeing any applicant approval raises immediate concern. Legitimate and safe lenders extensively evaluate their borrowers to ensure their obligations will be paid. At best, this red flag could get you involved with a predatory lender that insists on an absurdly high interest rate to compensate for the risk; at worst, it can lead to a scam.
2. No Credit History
A borrower requesting little or no credit history is an immediate red flag. This offer can certainly be attractive if you have a low credit score, but like the point above, lenders take on extreme risk with these loans and will try to offset it with incredibly high interest rates. If your credit score is relatively weak, we recommend you look for lenders that consider credit history along with other qualitative factors.
3. Impossibly Low Interest Rates
Interest-only periods are times where you only pay interest on a loan; they can span from months to years. While this offer may seem great, especially with the current circumstances, you still must repay the loan in full, making future payments considerably larger. Additionally, since the first period only consists of interest payments, you actually end up paying more in the end because it extends the overall time – and thus total interest payments – of the loan.
4. Interest-Only Period
Interest-only periods are times where you only pay interest on a loan. While this offer may seem great, you still must repay the loan in full, making future payments considerably larger.
5. Advance Fees
Never pay an advance fee to apply for a loan. Legitimate lenders will never require this payment. Often these requests will come from lenders who “cold call” clients on the phone, and too frequently they end up being a scam.
In addition to these red flags regarding loan terms, we strongly recommend that you be extra vigilant during the COVID-19 crisis; the FBI has even released statements urging people to be extra cautious as some people use this event as a scamming opportunity. When evaluating an unknown lender, be sure to check their website, read online reviews, and find their legitimate, physical address. We will happily help you verify lenders or refer you to some of our partners. Have any questions? Feel free to email clientservices@hilltopmfi.org for more information.
Published April 28th, 2020