Historically, the term LOAN SHARKs applied to corrupt lenders who exploit borrowers' financial needs to squeeze them out of whatever is left of their equity without regard to the borrowers' well-being. The term predatory lending is related to LOAN SHARK lending and mainly applies to non-bank companies offering subprime loans, while the term LOAN SHARK most often applies to an individual lender or small group of private money investors, AKA hard money lenders.
Both subprime lenders and hard money lenders provide essential services to consumers, and without them, our US economy would not function. Most subprime lenders are not predatory lenders, and most hard money lenders are not LOAN SHARKS.
Unfortunately, there is still a small percentage of private money entities who only care about their own pocket; these are the genuine LOAN SHARKS you should avoid at all costs. This article will guide you on detecting LOAN SHARKS and finding good private lenders that can facilitate your lending needs when banks are unwilling to lend to you.
LOAN SHARKS pray that you fail and default on loan payments so they can take away your property. On the other hand, private lenders who are Not-So-SHARK will work out a loan that benefits your financial goals and, in the event of default, will try to make arrangements so that you are not losing the property.
Lenders who charge high interest and high fees are not necessarily LOAN SHARKs. The main difference between LOAN SHARKS and private lenders who are not LOAN SHARKS is that LOAN SHARKS care only about making money for themselves. In contrast, lenders not LOAN SHARKs ensure that the loans they are arranging benefit the borrowers and have a defined exit strategy to make payments and pay off the loan.
LOAN SHARKS could sound very convincing; therefore, it is impossible to detect them just by talking. To ensure you do not become a victim of a SHARK operation, we put together a list of loan characteristics that flash out the elements which make a SHARK loan and help you decide which lender deserves your business.
Things to consider when trying to avoid LOAN SHARKS near you
Here are the characteristics of loans provided by LOAN SHARKS compared to those provided by Not-So-SHARK lenders:
LOAN SHARKS: 6%-15% loan rate above banks' rate for a similar type of loan.
Besides interest rates, loan payment characteristics could indicate LOAN SHARKing operation:
A. Late fees over 10% if payment is received after ten days grace period indicate a possible bad LOAN SHARK lender
B. Amortization period? If it is not interest-only or if not amortized over 30+ years, it might be hard to make monthly payments
C. The default rate can jump to double or more than the regular rate.
By itself, higher rates are expected from non-bank lenders and will not put the lender into the LOAN SHARK category unless combined with other characteristics.
Not-So-SHARKS: 2%-10% loan rate above bank rates for a similar type of loan. Expect higher rates from non-bank lenders..
Other factors to check
A. Late fees only after 10-15 days and only under 5% of the monthly payment
B. The loan is due in 1-30 years and amortized over 30 years or 15 years or interest only
C. The default rate is 5% or less of the loan rate
LOAN SHARKS: 5%-20% of the loan amount deducted as a fee. Bad SHARKS will have hidden fees under a variety of names: loan fees, processing, Inspection fee, funding fees, lenders fees, brokers fees, origination fees, document fees, legal review fees, warehouse fees, appraisal review fees, etc. Sometimes they are called junk fees; you need to look at total fees and calculate what percentage it is from the loan amount.
By itself, higher fees and higher rates are expected from non-bank lenders and will not put the lender into the LOAN SHARK category unless combined with other characteristics.
Not-So-SHARKS: 2%-7% of the loan amount deducted as a fee
LOAN SHARKS: Offer only very short terms, 3-6 months. The short duration almost guarantees that the loan will default for the inability to sell or refinance the property in such a short time. Sometimes the LOAN SHARK will offer an extension with high fees of 5%-15% of the loan amount
Not-So-SHARKS: Offer several loan term options of 12 months or more with modest extension fees.
TIP: On short-term loans of under 24 months, it is advisable to negotiate loan extension options before signing any loan documents. The extension option must be in writing and also appear on the note.
LOAN SHARKS: High prepay penalty for the entire loan duration makes it impossible to refinance or sell the property before the loan is mature unless paying the penalty. If the prepay penalty duration is the same as the loan duration, it is almost certain that the borrower will end up paying it. E.g., If the loan term is 12 months, and prepay penalty is also for 12 months, if you try to pay off the loan at any time before the 12 months, you will be penalized
Not-So-SHARKS: Give the option to have no prepay penalties or a prepay penalty for a short duration compared to the loan terms. E.g., the Loan duration for 24 months, and the prepay penalty is only for the first 12 months, which allows you to sell the property or refinance it after the first 12 months without paying any penalty.
TIP: The prepay penalty feature of the loan should be negotiable, and you should insist on at least 6-12 month window without prepaying penalty. Complicated loans and certain types of properties can take longer to sell or refinance and will require a longer window of time without prepay penalty.
LOAN SHARKS: Although hard money lenders are less regulated than banks, they still require local licenses from the states in which they are lending. Make sure that the lender you are dealing with has a valid license by checking the name of the lender and the company's name directly with the State licensing website.
The things to watch are
https://dfpi.ca.gov/mortgage-loan-originators
https://www.dre.ca.gov/MultipleDepartment.html
https://red.nv.gov/Content/Online_Services/License_Lookup/
Not-So-SHARKS: The good lenders will have clean records and typically will be in business for at least five years.
To find out about the licenses, search google for: "Official lenders (or mortgage) licenses search in State name."
Different agencies could provide licenses depending on the state your lender is based. They all should have ".gov" in the URL e.g.,
LOAN SHARKS: Before you agree to any loan, insist on getting a preliminary estimate of the rate & terms, including all the fees and all the approval conditions. Some lenders ask for advance payment; it is uncommon, but all by itself does not make the lender a LOAN SHARK.
Caution: Never pay for anything in advance unless you are satisfied with the preliminary loan approval, and check the lender's reputation.
Not-So-SHARKS: Make sure all the verbal disclosures are written down clearly. You should receive written disclosures about the loan terms and conditions before the actual loan documents and before paying any appraisal fees.
LOAN SHARKS: The internet and social media help flash out bad actors. Before you spend too much time with any lenders, check their names on the internet, and you can find troves of information.
Enter the business name and the name of the person you are dealing with into a google search to find reviews, complaints, or recommendations. Be suspicious if you only find very recent information
Some specific websites to check are:
https://www.bbb.org/
https://www.yelp.com/
https://www.linkedin.com/
Not-So-SHARKS: Reliable lenders will have a deep track record on the internet with years of recommendation. They are easy to spot.
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