The festive season is a time of great fanfare and celebration. However, amid all the merriment, it's important to be cautious about financial decisions. For many, the festive season brings increased expenses, prompting some to seek financial assistance from either traditional institutions or digital lenders. While such options may seem like a lifeline, not all of them are trustworthy.
Predatory lending, with its exorbitant fees, high-interest rates, and deceptive terms, poses a significant threat to borrowers' financial well-being during this time of year. Here, we'll explore four red flags to help you avoid falling into the trap of predatory lending and ensure a financially secure and enjoyable festive season:
Unregistered/unlicensed lender
One of the first things you should do before
applying for a loan is to check if the lender is registered and licensed to operate in your jurisdiction.
"This will ensure that the lender follows the laws and regulations that protect consumers from illegal or abusive lending practices. Besides obtaining a license, the lender must also be registered or partnered with the necessary regulatory bodies. A lender's registration details and license status can be verified online or by contacting the regulatory body. If a lender is unregistered or unlicensed, do not borrow from them, as they may be operating illegally or fraudulently," said Sonia Gupta, CBO at True Credit (Balancehero India), a
digital lending company.
Another warning sign of predatory lending is when a lender makes promises that seem too good to be true, such as guaranteed approval, instant cash, or no credit check.
As per Gupta, these promises are often used to lure gullible customers into a predatory loan that may have hidden costs or risks. For example, a lender may guarantee approval but charge a high upfront fee that is non-refundable. Or, a lender may offer instant cash and/or no credit check but make you give them access to your bank account and personal information or charge you a very high penalty for late payments.
"Hence, always read the fine print and ask questions before agreeing to any loan offer," Gupta told CNBC-TV18.com.
Unsolicited offers and too-good-to-be-true rates
Unsolicited loan offers with exceptionally low rates received through calls, emails, or texts are another glaring red flag. These offers are often scams that trick you into giving out your personal or financial information or paying a fee for a loan that does not exist.
"Even if the offer is legitimate, hidden costs or conditions may make it more expensive than it appears. For example, a lender may offer you a low-interest rate but only for a short term, after which the rate will increase significantly. It's essential to compare different loan options from reputable sources and not respond to unsolicited offers," said Gupta.
Lack of clear and transparent terms
The final red flag to watch out for is when a lender does not provide clear and transparent terms and conditions in the loan agreement. This can make it difficult to understand how much is being borrowed, the amount to be paid, tenure, and what fees or penalties apply.
"A lack of clear and transparent terms can also make it easier for the lender to change the terms without your consent or knowledge or to charge you hidden fees or penalties that were not disclosed upfront. Always demand clear and transparent terms and conditions in writing before signing any loan agreement, and do not agree to anything that you do not understand or seem suspicious," Gupta suggested.
