The Truth About Payday Loans and Other Predatory Lenders with Best-Selling Author and Financial Expert Harrine Freeman

Picture1


Predatory lenders succeed by deceiving borrowers. To better understand their tactics and who they target, we turned to financial expert, speaker, counselor, writer, CEO and owner of H.E. Freeman Enterprises, Harrine Freeman (@Harrine).

1. What is predatory lending and who does it target?

Predatory lending is a type of lending that benefits the lenders and harms the borrowers. It’s much more dangerous than other types of borrowing like using a credit card. Predatory lenders like payday and title lender use unfair, abusive, deceptive and fraudulent practices to entrap unsuspecting borrowers that are in dire need of cash.

Although loan terms vary, predatory lenders typically charge extremely high-interest rates and excessive fees. Also, the borrower’s credit score or ability to repay the loan isn’t usually considered by a predatory lender. This is because they actually want to keep the borrower in debt. By using unethical tactics like deception, unfair loan terms, and hidden fees, predatory lenders can trap the borrowers in debt for much longer than the borrower anticipated. And the longer the payday or title loan borrower owes, the more interest and fees the lender can charge!

Predatory lenders target those with low income, the elderly, and minority populations. If you have bad credit, are living paycheck to paycheck, or have little to no savings or are on public assistance, then payday and title lenders may be targeting you!

2. Who are the payday lenders and why is their product considered so predatory?

Payday lending is definitely a predatory lending practice. What makes it so predatory is the combination of short-term due dates and annual percentage rates that can exceed 300 percent. When you charge such high rates over such a short amount of time, it makes it very difficult to pay the loan back—and borrowers are then likely to default.

When an unsuspecting payday loan borrower faces default, they turn to what is called ‘rollover.’ This means the borrower “rolls over” the balance into a new loan causing them to be trapped in a continuous cycle of debt.

3. What are title loans and are they more or less dangerous than payday loans?

A title loan—or car title loan—is a secured loan that allows borrowers to use a car title as collateral for a loan. Borrowers surrender their car title to get approved for the loan. A lien—the right for them to take your car—is placed on the car. When the title loan is repaid, the lien is removed and the car title is returned to the borrower. If the borrower defaults on the loan and can’t repay it, the lender can repossess the car or sell it to repay the borrower’s outstanding debt.

Interest rates can be as high as 600 percent and must be repaid within 30 days including additional fees.

Like payday loans, title loans are short-term loans offered at extremely high-interest rates, and they don’t typically require a credit check. Interest rates can be as high as 600 percent and must be repaid within 30 days including additional fees.

Title loans are even more dangerous than payday loans because they charge higher interest rates and they risk the loss of your car. Some title lenders require the purchase of additional services such as roadside assistance.

Title loans just don’t make good financial sense—especially when you consider that they generally offer borrowers only 25% to 50% of the value of the car.

4. Are pawn shops predatory lenders?

Yes, pawn shops are predatory lenders.

A pawn shop loan is similar to a title loan in that it’s secured by an item of value as collateral. A borrower brings in a personal item of value, the pawnbroker appraises the item and offers borrowers loans that are a small percentage of the item’s value.

Pawn shop lenders are predatory because they offer short-term loans that have high-interest rates and additional fees. If a customer is unable to pay the loan plus fees the pawn shop keeps the item and sells it. Pawn shop loans do not require a credit check. The amount of the loan varies by pawn shop and state. There are just better ways to get a loan that don’t require losing an item of value.

5. Are there alternatives to pawning your personal possessions when you need cash?

Yes, there are definitely alternatives to borrowing money from a payday lender. You can try borrowing money from relatives or friends. If you’re in a real bind, contact social service agencies like the Salvation Army, Catholic Charities, local or state emergency financial assistance programs or other social service organizations such as churches. You can sell new, unused items in good condition on Amazon, Craigslist, eBay, Etsy or have a yard sale.

But the best way to avoid predatory lenders is to create a budget and stick to it. Reduce your spending by 30% to 50%, and build an emergency savings fund. If you have as little as $500 on hand for emergencies, it can be extremely helpful and keep you out of the grip of a predatory lender.

6. In general, predatory lending targets the lower-income and the financially vulnerable. What can this population do to protect themselves from payday lenders? 

In addition to budgeting every month and building an emergency savings fund, there are other ways to protect yourself from predatory lenders.

If you’re in a tough financial situation, I advise:

  • Avoid companies that have had a high number of bad reviews with the Federal Trade Commission, Better Business Bureau, or Consumer Financial Protection Bureau or bad reviews that appear via a Google search.
  • Avoid doing business with companies that guarantee approval regardless of credit or income. Avoid companies that pressure you to apply for a loan.
  • Avoid companies that avoid questions about or are not transparent about disclosing fees and terms as required by law. Comparison shop and ask questions to ensure you understand the product being offered and the terms and conditions.
  • Contact a consumer credit counseling company or financial coach to help you examine your spending and develop a plan to repay your debt.

< previous | next >