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5 Red Flags of a Toxic Online Loan

May 5, 2016
Loans, Payday Loans, Personal Finance, Personal Loans
5 Red Flags of a Toxic Online Loan
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Online lenders have made it easier to get a personal loan. But the dangers of transacting online haven’t changed.

For every responsible new lender, there are many bad actors. Some may be scam artists with fake sites who want your information. Others may be real sites operating legally — and still determined to mine every dollar they can from your bank account.

That means you should pay attention to the company you’re dealing with.

“Scam sites are so easy to set up, and the criminals can disappear so quickly that you need to think twice about who gets your financial information,” says Liz Weston, NerdWallet personal finance columnist. “But it’s not just about fraud. Even legitimate lenders can offer terms that should stop you in your tracks.”

Here are five red flags to watch out for when you’re shopping for an online personal loan:

1. Is the website secure?

Don’t share your personal information unless you’ve checked to see that the lender’s website is secure. The URL should have “https” instead of just “http” and a small lock next to the URL or at the bottom of the browser window. Secure websites need to have a valid security certificate that hasn’t expired, so even if you’ve visited the site before, always check to see if it’s still secure.

“If a lender doesn’t have a security certificate, then they’re probably not legitimate,” says Karen Barney, director of research and publications at the Identity Theft Resource Center in San Diego.

2. Does the lender check your credit?

The most important red flag is whether a lender checks your credit before offering you a loan.

Even the new crop of online lenders that look at alternative data, such as your earning potential or college degree, always take your credit into account in some way.

Beware sites that promise fast cash and tell you that your credit score doesn’t matter; it does. Lenders that don’t check your credit make up for the risk by charging triple-digit interest rates and hidden fees. Don’t let the fact that a lender is willing to offer you a loan lure you into ignoring the toxic terms of the loan. You may need the money fast  — but you may never be able to repay the loan.

For example, compare a two-year, $2,000 loan at a 36% annual percentage rate (a high rate that is typically the cap at most reputable lenders) versus a loan at 200% APR from a lender that doesn’t check your credit:

  • At 36%, the payments total $2,834.
  • At 200%, the payments total $8,203.

If you’re looking for quick cash, there are cheaper alternatives to no-credit-check loans.

3. What’s in the fine print?

All lenders are legally required to state the annual percentage rate on a loan, which is the sum of the interest rate and all fees. When a lender gives you a quote, make sure it is the APR and read the loan agreement carefully to check for late fees and other costs.

The most common type of fee associated with an online personal loan is the “origination fee.” Some lenders charge this to match borrowers with investors who fund the loan or to cover their operating costs.

Apart from this fee, which is baked into the APR, no online lender should compel you to pay to get a personal loan.

For example, lenders cannot force you to buy add-on products like credit insurance. If a loan requires insurance, then the cost has to be clearly included in the APR, says Lauren Saunders, associate director at the National Consumer Law Center, a nonprofit advocacy organization.

4. Does the lender require electronic payments?

No lender can demand access to your bank account, says Saunders.

Most online lenders prefer that customers pay electronically, and some may charge a fee for paying by other means, like a personal check.  But if a lender says you have to pay electronically, it’s a red flag.

Instead, look for companies that allow flexible payment options or offer help from an advisor when you run into difficulty making payments. Unscrupulous lenders with access to your checking account may treat it like an ATM, racking up bank penalty fees with repeated payment requests if you don’t have enough money.

5. Have others complained about the lender?

Do your homework on the lender’s online reputation, just as you’d turn to Yelp for restaurant reviews.

Check out its rating on the Better Business Bureau website and see how many complaints are registered against the company. Look for the lender’s name on the Federal Trade Commission’s Scam Alerts website. And finally, check the Consumer Financial Protection Bureau’s complaints database. The bureau began accepting complaints about online lenders in March.

Amrita Jayakumar is a staff writer at NerdWallet, a personal finance website. Email: Twitter: @ajbombay.