Is there such a thing as a bad lender?
Bad lenders, unfortunately, exist everywhere, but are, to date, particularly poorly regulated in the United States. Sometimes, the people “selling” the loans don’t understand them, making them particularly dangerous. Some questions to ask yourself when steering clear of a bad lender:
– Does the salesperson provide clear explanations? If you question a clause, does the salesperson explain the answer in unnecessarily complex terms, or give you a circular explanation? This doesn’t necessarily mean they’re a bad bank, but it is a warning sign.
– Does your salesperson get paid commissions? Reputable banks do not pay their account managers commissions. The focus is on credit-worthiness and safe investments. Don’t forget, they are in the lending business to make money. It’s important to note that under most regulatory agencies, the salesperson is obligated to answer if you ask them this question.
– Does the salesperson push a higher loan amount? Unless your financial situation is about to change for the better, you shouldn’t be borrowing the maximum allowable. The standards for loan amount are punishingly difficult to sustain. A good test is to suggest a smaller loan amount to the salesperson. If they are looking at your best interest, they will likely agree that if you can afford to take less than the maximum allowable, you probably should.
– Do they provide a thorough, clear, WRITTEN outline of the loan terms? If the terms are unclear to you, they may well be hiding something.
– Further – do they discourage you from discussing the paperwork with your lawyer in any way? Comments that are derogatory towards lawyers, or that the’ll ‘save you the money’ are a red flag. If the written agreement is clear and conscionable, then your mortgage broker or the lender’s representative should have no problem with this.
– Are there unreasonably harsh penalties for a bounced cheque, missed payment, or other minor first time offenses? A bounced cheque should cost you $50 the first time. Clauses under which the bank can repossess, change the rate, or charge an exorbitant fee are dead giveaways for a lender you want to steer clear of.
Most importantly, when dealing with lenders, use your common sense. Step back. Does the loan make sense? Especially in the United States, where there is no recourse to walking away from a mortgage, why would a lender give a 100% mortgage? Are you paying in the double digits for interest rates?
Other things to look out for trailer fees, administration fees, lender’s legal costs. Any additional fee should be worked out up front ask them to, it’s their job!
Avoiding a bad lender is, for the most part, an easy thing to do if you’re willing to take less money for a lower rate. The most important thing is to note that if you have any dependants, you probably cannot afford to borrow the maximum allowable.