Top 3 Red Flags That You Should Not Ignore When Applying For A Loan

In more than half a decade of my working in the financial sector, I can say that there is a natural tendency for borrowers to become so anxious of their loan approvals that they ignore some red flags from the lender. For most borrowers, the desire to get their loans approved is far stronger than knowing if the loan is a potential trap. The truth of the matter is that there are many mean lenders out there whose sole mission is to rip the borrowers. In this article, I explore three of the most important red flags which a borrower must not ignore when applying for a loan.

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1. Crazy Interest Rate

An interest is simply the extra charges, usually a certain percentage of the amount borrowed, which you pay on a loan. The interest is basically very important for both the lender and the borrower. To the lender, the interest is very important because it is a revenue while it is important to the borrower because it is a cost.

Therefore, a clash of interests constantly exist between the lender and the borrower. While the lender wants the interest to remain high, the borrower wants it to be reasonably low.
A red flag therefore arises in a situation whereby the borrower is confronted with an insanely high interest rate. This would mean that the lender is inconsiderate, greedy, and selfish. In that case, the borrower might likely run into serious trouble if he or she goes on with the loan application.

2. Lack Of Transparency

Usually, a loan contract is expected to exist between the lender and the borrower. A loan contract is a formal agreement between the lender and the borrower. It clearly states the terms and conditions under which the loan is disbursed.

The least that is expected from the lender is transparency, plainly stating out to the borrower the terms and conditions under which the loan is disbursed. A red flag appears in a scenario where, for some selfish and inhuman reasons, the lender intentionally attempts to hide or obfuscate all or some of the terms and conditions of the loan. This is mostly done to ensnare the borrower. A wise borrower is expected to terminate the loan application when such is suspected.

3. Demanding Excess Collateral

A collateral is usually an asset that is used to secure a loan. In most jurisdictions, all loans must be collateralized to protect the lender in the event that the loan goes bad. The rule is that the total collateral for a loan should be equal or slightly greater than the approved loan. Demanding collateral from the borrower is a standard practice but doing so in excess is a red flag.

In most cases, once a lender demands for too much collateral than necessary, it could indicate that it is more interested in confiscating the borrower's asset than in the borrower being able to repay the loan amount.

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