How to Protect Yourself from Shady Moneylenders and Loan Scams
In the early 2000s, people rarely required loans for their family’s daily ends. Even with a single bread earner, families were able to manage everything they needed. Fast forward to 2020, and loans almost feel necessary for day-to-day survival.
Ever-changing lifestyles contribute to the increased number of borrowers. Whether to support education, buy your dream house, or even arrange your marriage reception, you can get a personal loan just about anywhere for just about anything. Preparing against false and exploitative moneylenders and loan scams would be best.
Safeguarding Yourself From Loan Scams
Moneylenders can exploit borrowers in many ways, especially when potential borrowers are young in their 20s. Even in the 21st century, you might be unaware of moneylenders’ underhanded tactics to lure people into taking loans that rob them of their hard-earned cash. To protect yourself from such moneylenders, familiarize yourself with the types of lenders and scams you should avoid at all costs.
Lenders Providing No Credit Check Required Loans
Your credit score plays a critical role during the loan application process. With an impressive credit score, you can get just about any loan, although we do not recommend it. Still, several online moneylenders promise to give needy people loans without checking their credit scores.
The Consumer Financial Protection Bureau (CFPB), a US regulatory institution, warns people against borrowing money from lenders who promise not to check or show no interest in checking their credit score. The standard advertisements moneylenders use to find their targets include words like “Bad credit? Not a Problem.”
Lenders Charging Penalties for Prepayment
Money borrowers are often uncertain of the financial terms involved in the loan-issuing process. While no one can blame you for not knowing all the terms involved, you should still be aware of the false terms and fees that sneaky moneylenders add to your application.
Prepayment penalties constitute a fine that unscrupulous moneylenders may try to charge you. Such corrections may be legal, but you should never accept them as the price of doing business. Moneylenders use terms like these to trick borrowers into delaying loan repayment to charge their borrowers additional interest fees.
Lenders Asking for Advance Payments
When you apply for a loan from a bank or other moneylender, never proceed if they ask you to pay upfront (or “advance”) fees. Several laws prohibit specific advance fees, but they are still legal in mortgages and other financings. You should always look elsewhere if a lender asks you for an advance fee or requires you to set up automatic payments for several months to cover their costs before they approve your loan. If the lender is not a scam, they are, at the very least, dubious.
Such moneylenders are risky and conduct scams on a large scale. Their idea of lending money is similar to pyramid schemes, banned in many countries. Always refuse to work with lenders who ask you for an advance payment.
Involving Precomputed Interest
Most Americans know how interest works and should only be charged and calculated during the loan’s repayment period. Unfortunately, many lenders focusing on serving sub-prime borrowers (those with no credit or a poor credit rating) often use the “Rule of 78” to precompute interest. If you apply for a loan based on Rule 78, your early monthly payments will be more suitable than later payments. If you wanted to pay the loan off earlier, you would have already paid more interest than you would have with a standard loan.
Although precomputed interest loans are not illegal in the US, you should still avoid them since they substantially favor money lenders and are often misused. Lenders that advertise “buy here, pay here,” “interest refunds,” or “interest rebates” often use the Rule of 78 to set up their loans.
Loans Requiring Insurance
You can tell the difference between fraudulent moneylenders and trusted lenders by watching for the insurance policies they offer to secure your loan. Some sketchy lenders even offer loans for the same term length as the insurance policy. It is as if you are paying for interest twice, first paying the claim itself and then paying the premium to cover the attraction if you can’t pay the share.
Most legitimate loans are unsecured except for real estate and vehicle loans. Trustworthy lenders will never require you to purchase insurance before approving your loan, except for certain mortgage loans if you do not have enough money for a 20% down payment.
When considering a loan, make doubly sure you need it, not just want it. Borrowing for wants leads to regrets (see our free Savings Roller Coaster webinar here). If you must borrow, avoid questionable and dodgy lenders and favor reputable banks, credit unions, and other licensed money lenders.