Many small business owners and commercial property investors are turned down by their banks for commercial mortgages. It’s a fact of life for many people, but many borrowers aren’t prepared for this. If they are unfamiliar with alternative commercial financing, this leaves them potentially vulnerable to predatory lenders. If you’re a borrower seeking a commercial mortgage, and you’ve been turned down by the bank, it’s important to be aware of this when seeking financing elsewhere.
What makes a lender predatory?
In the simplest terms, a predatory lender is one that uses deceptive practices and misinformation in order to mislead borrowers and convince them to take out loans which are not in their best interest. These lenders design their loan products to be confusing to borrowers, particularly when it comes to the terms of the loan and payment obligations. They target borrowers who have limited experience with financial products, who are unlikely to qualify for traditional loans (such as from a bank, a credit union, or the SBA), and who they believe are less likely to have access to legal aid.
How can I spot a predatory lender?
Usually when we’re discussing predatory lenders, payday lenders and auto-title lenders tend to come up most often, but this descriptor includes any lender using unfair or deceptive tactics.
So, how can you determine if a lender is predatory? Here are some signs:
Three-digit interest rates
While non-bankable borrowers are certainly going to be paying higher commercial mortgage rates than they would with a traditional lender, there’s rarely a good reason for them to be paying the exorbitant rates predatory lenders charge. It’s important to be aware of high fees that will inflate your APR, or annual percentage rate. The rate a predatory lender advertises might seem reasonable on the surface, but once fees are factored in, rates of 200%, 300%, 400%, and even higher are not uncommon. Rates this high typically signal that the only thing a lender cares about is making money, rather than whether the borrower can repay the loan. Good lenders know it’s in everyone’s best interest to make sure a borrower can make their commercial mortgage payments.
“No credit, no problem”
If you hear or see an advertisement that uses this phrase, be wary. There are commercial mortgage options out there for borrowers with credit issues, but if a lender says that your bad credit or lack of credit doesn’t matter, or that they won’t check your credit at all, that’s a red flag. Again, you want to work with a lender who will fairly evaluate your financial situation and make sure that you will be able to repay the commercial mortgage.
One of the most common tactics predatory lenders use is confusing loan terms designed to extract the most cash possible from a borrower. For example, let’s say a borrower takes out a short-term, high interest loan, and every pay period the lender takes $125 from their account. In the borrower’s mind, that means the loan should be paid off in eight pay periods. What predatory lenders don’t make made clear to the borrower is that the loan amount is typically due in full on the date of their first payment. If it isn’t received in full, you will be charged a fee to renew the loan. So, that $125? That’s not a loan payment; that’s your renewal fee. Your principal is left untouched, and you’ve lost a substantial amount of money before you realized what has happened. Often, borrowers feel trapped, and will continue taking out more predatory loans in order to try to make their payments, which can lead to a cycle of debt.
Access to your bank account is a requirement, not an option
Almost all reputable lenders offer their customers the convenience of autopay, but other payment methods are accepted, and access to your bank account is not a requirement to receive a commercial mortgage. However, some lenders require this information as a condition of the loan so that they can automatically debit your account. By the time most borrowers realize their mistake, it’s too late and the lender can continue to withdraw payments.
A bad reputation
Before working with a lender, you should always do as much due diligence as you can. Consumes need to be cautious of lenders that have received a substantial amount of negative feedback. Start with a Google search, and if what you seen concerns you, visit the Consumer Financial Protection Bureau’s complaint database for more information.
For borrowers, a bank turndown can be a major challenge, especially if you’re not familiar with alternative commercial financing. However, there are plenty of lenders in the niche who will evaluate your request and provide you with fair and reasonable commercial mortgage terms. Make sure that you are as knowledgeable as possible before you begin seeking commercial financing so that predatory lenders don’t get the opportunity to take advantage of you.