Research can help avoid targeted predatory loans

By Raúl Arcos Hawkins

Small businesses face challenges on a daily basis and the holiday season is no exception.

With the stress that comes with the holiday season, some small business owners become vulnerable to predatory lenders who target them with loans that seem too good to be true. However, small business owners can access many resources to make sure they don’t fall victim to a predatory loan.

As with any loan, research is key. For example, before applying for a loan, the business owner should research current interest rates to get a good sense of what they should expect. If a lender is offering something excessively higher, that’s a red flag. Additionally, predatory lenders often promise one type of loan or a certain interest rate, but then give the business owner a different loan or a higher interest rate. Sometimes, the higher interest rate won’t take effect until a few months into the loan.

While tempting, if a lender promises to extend an offer without checking the business owners’ credit history, steer clear. Credit checks are used to evaluate the owner’s ability to pay off the loan within reasonable terms. A lender who avoids this step may offer a loan the business can’t afford and lock them into a cycle of debt.

Other warning signs include excessive fees, rushed approval of paperwork, balloon payments, unsolicited offers, prepayment penalties, and offers to help set up automatic payments from a borrower’s bank account.

For many, owning a small business is the ultimate American dream. Even though predatory lenders exist, plenty of reputable ones offer reasonable loans. By researching and reaching out to organizations such as the Center for Rural Affairs, securing a loan that works for them can turn their dream into a reality.

Hawkins is a business development specialist with Center for Rural Affairs.