7 Lender Red Flags to Look Out For

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Borrowing money—to purchase a home, buy a car, consolidate credit card debt and more—can benefit your financial life. But the process of getting that money can be intimidating. You can remove a lot of the uneasiness by doing your homework, such as reviewing your credit report and checking your credit score. Before you obtain new credit, you also should check the lender for red flags that might signal potential problems.

Here are seven red flags to look out for when you're considering a lender. Paying attention to these warning signs can help you avoid questionable lenders and can help steer you toward legitimate ones.

1. Not Doing a Credit Check

If a lender doesn't plan to check your credit report and score when you submit your application, it could be a sign that something is fishy. In some cases, loans are available without a credit check. For instance, a number of upstanding credit unions offer small short-term personal loans (called payday alternative loans) without a credit check. Other lenders, such as payday and car title lenders, also might approve you for a personal loan with no credit check, but these loans often come with high interest rates and high fees.

Bottom line: Approach no-credit-check loans with caution.

2. Rushing You Through the Process

Shady lenders often will push you to quickly sign loan paperwork without reading it. Or they might tell you to just ignore all the fine print. If you run into a lender who hurries the process along, they might not want you to see language in the lending agreement that favors the lender, not you.

You likely don't want to do business with a lender that doesn't allow you enough time to thoroughly review the terms of a loan.

3. Making Unreasonable Promises

Follow your instincts when you're discussing a loan with a lender. If the terms of a loan seem too good to be true, you may be dealing with a lender that's not trustworthy.

For instance, a lender might promise that you can hang on to your home with a better financing deal—but only if you hand them the title, then rent the home from them and eventually buy it back. These and other full-of-promises lending schemes are the work of con artists.

"Many predatory lenders are slick salesmen. They know how to talk. They don't always tell you the whole truth," the U.S. Justice Department warns. "If a deal doesn't sound right to you, don't do it."

4. Offering Significantly Different Interest Rates From Other Lenders

You think you've found a lender whose interest rates can't be beat by any of its competitors. In some cases, though, those rates come with strings attached. For instance, a mortgage lender might offer a super-low interest rate—but only for an introductory period as short as 30 days. After the introductory period ends, the interest rate goes up substantially, meaning you'll pay much more than you thought to borrow money for a home purchase.

To avoid this type of scam, look for written proof of what the loan's APR (annual percentage rate) is.

5. Finding Discrepancies in the Terms and Conditions

The terms and conditions of a loan include details such as the length of the loan, the APR, the monthly payment amount and the fees. All the terms and conditions of a loan should be in writing.

Now, let's say you're looking over the terms and conditions of a loan and discover differences between what you were told verbally and what you see on paper. For instance, you were told the APR was supposed to be 9.99%, but the terms and conditions show it's 11.99%. Or you were informed the monthly payment would be $399, yet it's listed as $489.

If you come across discrepancies like these, don't sign the paperwork until you've resolved the issues. For peace of mind, you might even consider doing business with a different lender.

6. Asking You to Falsify or Leave Out Information

You're sitting at a table across from a lending professional and filling out a loan application when they instruct you to inflate your income and leave a couple of parts of the application blank. In other words, this person is asking you to lie about your information and to bypass supplying other information.

This is a sign that you're likely dealing with a crooked organization or loan officer. Worse yet, if you're caught falsifying a loan application, you could be charged with a crime.

7. Dodging Your Questions

It's normal for a borrower to pepper a lender with questions: What's the APR? How much time will I be given to pay off the loan? Are there prepayment penalties if I pay off the loan early? It's not normal, though, for a lender to avoid answering your questions.

A reputable lender will take the time to make sure you understand all of the details about a loan. If, however, a lender ducks your questions, they might be trying to hide something. This should raise suspicion and cause you to think twice about taking out a loan from this lender.

The Bottom Line

Do research about a lender before you put your trust in them—and before you sign on the dotted line. If you stumble across red flags before or during the loan process, reconsider whether you should borrow money from this lender. In addition to checking out a lender, you should check your free Experian credit score and credit report when you're shopping for a loan since it will play a factor in your potential interest rate and loan terms.

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