When looking to take out a loan, you really want to make sure that the lender is telling you everything they’re not. You’ll need some tips on how to find signs of fraud and what it looks like when someone’s trying hard enough.
The “personal loan frauds” is a scam that has been going around for a while. Here’s how to tell if you’re being deceived by a lender or broker.
Anyone who has worked in the lending sector understands how dangerous it can be for small company owners. Brokers and lenders often attempt to take advantage of small company owners due to the complex nature of loans and legal jargon.
That is why we wrote this post to highlight three ways brokers and lenders attempt to mislead small companies, so you and your company don’t become another loan sector victim.
1. Don’t get the terms factor rate and annual percentage rate mixed up (APR)
A common broker/lender technique is to disguise the factor rate as an annual percentage rate (APR).
Assume you take out a $100,000 loan with a 10% annual percentage rate. You could pay $12,000 in the first month, with approximately $11,167 in principle and $833 in interest. You still pay $12,000 in month two, but you only pay interest on $88,833, or $740.
As you pay down your principle, you’ll pay less and less interest and more and more principal. Using these figures, you’d be able to pay off your $100,000 loan in nine months while only spending $4,100 in interest.
The difficult part is that brokers and dealers will often substitute a factor rate, which is quite different, for APR. So they’ll claim, “You can obtain this loan for just 1.1 factor rate.” You will be required to repay $110,000.”
So, that’s only 110 percent, or a ten percent annual percentage rate, right? Wrong. Although the arithmetic is too complex to get into in this post, you may obtain an approximate estimate of your real APR by multiplying the factor rate number (after the decimal point) by 24 for a one-year loan.
In other words, with a factor rate of 1.1, your APR is approximately 26.4 percent, which is much more than 10%. If you’re looking for the real APRs of the main alternative lenders, read up on it.
2. Be wary of loans with a “no prepayment penalty” clause.
Many brokers and lenders promote no prepayment penalties on their loans. To put it another way, you may pay off your loan early without incurring any additional fees, thus lowering the amount of interest you pay.
However, you must read the small print to understand how interest is calculated, since many brokers/lenders may claim no prepayment penalty but then charge you the same amount of interest as if you had kept the loan for the full term.
Instead of calculated interest, you want the loan to have simple interest. Let’s use the previous example as an example. If the loan had been a simple interest loan, the borrower could have paid it off in one month for $100,833 ($100,000 principle + $833 interest).
The borrower pays basic interest for the amount of time they borrow the money. Computed interest, on the other hand, is calculated on the basis of borrowing the money for the whole period of the loan, even if the money is paid back early. With the estimated interest, the total cost of repaying the loan in one month would be $104,100 ($100,000 principle + $4,100 interest).
3. Keep an eye out for hidden costs such as shipping, origination, and other charges.
Brokers and lenders prefer to add on extra costs to your loan, which are often referred to as “origination” or “packing” fees.
An origination fee is a fee charged by a broker or lender for their “work” in locating the borrower and completing the loan paperwork (also known as processing or application fee).
The most difficult costs to calculate are origination fees, which are often taken from the loan’s principal at the outset. So, if you take out a $10,000 loan with a $500 origination charge, many lenders will only offer you $9,500 in cash, even though you would continue to pay interest as if you had gotten the whole $10,000. It’s crucial to inquire about origination and packing costs up advance so there are no unpleasant surprises when you get your money.
When it comes to obtaining a small business loan, it all boils down to doing your homework, reading the tiny print, and seeking expert assistance if required to ensure you are not being taken advantage of. Before you sign on the dotted line, you’ll at least have a better understanding of what to watch out for and which questions to ask.
Are you in need of a loan? Our loan finder for small businesses is a fantastic place to start.
Watch This Video-
The “mortgage investigation bureau” is a company that specializes in investigating the possibility of mortgage fraud. They are able to tell whether or not a lender or broker is deceiving their customers by looking at various factors.
Frequently Asked Questions
Can a lender lie to you?
A: A lender is legally allowed to lie.
Is it better to go through a broker or lender?
A: It is generally better to go through a lender or broker, as these individuals can help you get the best loan for your needs. Brokers and lenders typically charge an upfront fee but make their money back in interest over time.
How do you know if a mortgage lender is legitimate?
A: A legitimate lender is one that has been approved by the state and federal government. The mortgage lender should show their approval documents on their website too, in order to be considered a real company.
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