In many cases, a student loan can help provide an education that pays many times the cost of the loan. However, that doesn’t mean that you have to take a loan from anywhere you can get one.
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While most student loan providers are legitimate, there are still a large number of predatory lenders looking to take advantage of your need for financing. Here are some signs you should watch out for when choosing a lender to protect yourself from predatory businesses.
Last updated: September 23, 2021
Lenders have a legal and ethical obligation to disclose all information about a loan to a borrower. If you find a lender who is reluctant to provide you with full loan disclosure, take this as a sign that you are dealing with an unscrupulous institution. You should have access to all of your loan details, from interest rate and Annual Percentage Return (APY) to all fees and costs. Any discussion like “we are experts, just trust us” to “you will get all the information at the end of the process” should be a warning sign.
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Exorbitant interest rates
If you have bad credit, you should expect to pay higher interest rates on any type of loan, including your student loan. However, if you’re dealing with a lender that offers triple-digit or even high double-digit rates, you should look for another. Triple-digit interest rates are the hallmark of predatory lenders like payday loan companies, and these should be avoided at all costs. While a lender is entitled to compensation based on the risk they take, these types of lenders prey on those who feel they have no other options. Even if you feel like you can’t find a legitimate lender to fund you, keep looking; accepting a shark loan like these is a sure way to dig yourself into a bottomless hole.
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Fees for basic services
Lenders should be allowed to charge a fee for certain services, but if you find a lender that gives you money for everything, it’s time to move on. While loan origination fees and interest charges are common, avoid lenders who want to add $ 1 for customer service phone calls, $ 5 for online access, or $ 10 because of your credit score. is weak. This is especially true if any of the service fees charged by a lender are not listed in your loan disclosure documents. Remember that any legitimate lender will provide you with a black and white printout of all the fees and charges that you will face. Any lender who hides them, especially while charging a battery of service fees, should be avoided.
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No credit check
Strange as it sounds, a lender who advertises “easy approval” or “no credit check” is more likely to be unscrupulous than a lender who demands a serious credit check. This is because legitimate banks take a risk-based approach to lending, primarily based on the information in your credit report. If you have a history of credit problems, you will likely pay a higher rate on your student loans than someone with a clean history.
However, predatory lenders often do not require a credit check because their loans are secured by your personal assets. This means that if you’re having trouble repaying your loan, your lender can legally claim your collateral, whether it’s your car or even your house. You never want to be in a position where you can lose something essential just because you are having trouble paying off your student loans. In fact, the Federal Trade Commission even has a term for this type of high risk secured loan, dubbing it “equity stripping” because it often ends up causing borrowers to lose some of their vital assets.
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Legitimate lenders don’t exert pressure to close a deal like predatory lenders do. An honest lender really wants you to be successful and to be able to pay off your loan; that’s how they make money. But a predatory lender just wants to charge you a fee and potentially claim your assets. In fact, in many cases, a predatory lender sets up a loan with terms so onerous that they expect a borrower to default, in which case they can seize a borrower’s valuable collateral.
If you feel pressured into signing a loan document, take a step back and take a look at what exactly you are signing. Any qualified lender will be happy to walk you through the ins and outs of your loan terms, while a predatory lender just wants you to sign on the dotted line as quickly as possible.
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This article originally appeared on GOBankingRates.com: 5 Signs Of Predatory Student Loans And How To Avoid It