Avoid Predatory Loan Terms: Red Flags to Watch

Predatory lending targets small businesses with unfair terms, hidden fees, and high costs. Learn to identify red flags and protect your business.

Red flags to watch for

• Extremely high APR: Rates above 50-100% APR
• Hidden fees: Origination, processing, or "admin" fees not disclosed upfront
• Prepayment penalties: Fees for paying off early
• Personal guarantees: Requiring personal assets as collateral
• Confusing terms: Complex language designed to hide true costs

Common predatory practices

• Stacking: Multiple loans that compound debt
• Renewal traps: Automatic renewals with higher rates
• Balloon payments: Large final payments that are hard to afford
• Daily payments: Excessive daily deductions that hurt cash flow
• No cooling-off period: Pressure to sign immediately

How to protect yourself

• Read everything: Don't sign without understanding all terms
• Calculate true cost: Include all fees in your comparison
• Get multiple quotes: Compare at least 3-5 options
• Ask questions: Clarify any unclear terms
• Consider alternatives: Explore bank loans, SBA loans, or grants first

Fair lending indicators

• Transparent pricing: Clear APR and fee disclosure
• Reasonable rates: Competitive with market rates
• Flexible terms: Options for different payment schedules
• No prepayment penalties: Can pay off early without fees
• Good reputation: Positive reviews and BBB rating

Questions to ask lenders

• What is the total cost including all fees?
• What is the effective APR?
• Are there prepayment penalties?
• What happens if I miss a payment?
• Can I get a copy of the contract to review?

When to walk away

If a lender won't answer your questions clearly, pressures you to sign quickly, or offers terms that seem too good to be true, it's time to look elsewhere. Your business deserves fair, transparent financing.