Predatory Lenders

Predatory Lenders
Predatory lenders are financial institutions that use deceptive practices and unreasonable terms to profit off of borrowers in desperate need of funds.

What is a Predatory Lender?

A predatory lender offers loans that are intentionally difficult to repay so that borrowers continue to accrue more interest and fees by falling into what’s known as a “debt cycle”. A debt cycle occurs when a borrower is unable to repay a loan and is forced to extend it and pay additional fees to do so.

Many different types of predatory lenders can be found online and in storefronts throughout the country. The biggest indicators of a predatory lender are extremely high interest rates, short repayment terms, unnecessary additional fees, and failure to disclose important information about the loan.[1]

Common Predatory Lenders

Payday lenders — These are dangerous, short-term lenders that typically charge interest rates between 390-780%. Payday loans range in size from $100 up to $1,000 and are usually due within two weeks of taking out the loan. To take out a payday loan, borrowers are required to provide the lender with a post-dated check for the amount of the loan plus interest and fees. On the loan’s due date, the lender will cash the check, reclaiming their money. When borrowers are unable to repay the loan, lenders will usually allow for an extension of terms while charging additional fees and interest.[2]

Title lenders — Tile lenders are also predatory in nature. In order to receive a title loan, you’ll be required to offer up the title to your vehicle. You’ll then receive a cash loan based on a fraction of what your vehicle is worth. Generally, a title loan will come with an interest rate around 300% and will be due within 30 days. If a borrower is unable to repay this loan, the lender is legally allowed to take the vehicle and sell it to make their money back.[3]

Tax refund anticipation lenders — These lenders offer cash advances to people expecting a tax refund check. You can expect to pay interest rates between 40-700% annually for one of these loans. They’re pitched as a solution for people who don’t want to wait for their refund check, but it may only speed up the process by as little as one week.[4]

Pawn shop lenders — This option is similar to title loans, but on a much smaller scale. In order to get a pawn shop loan, you’ll offer up a valuable item like a television, musical instrument, or piece of jewelry and the pawn shop will offer you a small cash loan based on its value. Usually these loans are for very small amounts and are due within four weeks. They also carry high interest rates and additional fees for storage of the item. If you’re unable to repay the loan, the pawn shop can sell your item(s) to others.[5]

How to spot Predatory Lenders

Predatory lenders can cause serious damage to your finances. It’s important to know what to watch out for. If you’re dealing with a predatory lender, you may encounter the following red flags:

Unreasonable interest and fees — Some predatory lenders charge upwards of 700% annual interest for loans. In addition, they may attempt to charge you application fees, origination fees, document preparation fees, and more. The most common victims include those with poor credit. Predatory lenders know that these people have few options for loans, so they raise their interest and fees, forcing low-income borrowers to default and sink even further into debt.

False disclosure — If a lender does not disclose all of the fees and charges, or fails to inform a borrower of certain loan terms, they are most likely predatory. One common practice of predatory lenders is telling a borrower the monthly interest rate, rather than the APR (Annual Percentage Rate). The APR includes all fees and interest and is a better representation than the monthly interest rate of what the borrower will owe. This is why it’s extremely important to read the fine print. Don’t ever sign anything without reading it first.

Unfair pressure – Some lenders may try to pressure borrowers into signing a loan contract before they’ve had a chance to review it. If you feel pressured, then you may be dealing with a predatory lender. They do this so that borrowers won’t have a chance to read the details of the loan, which may include unreasonable terms.

Prepayment penalties — Paying off a loan early should be a good thing. However, for predatory lenders it means they won’t make as much money. If a lender has high prepayment penalties, you may want to avoid taking out a loan with them. There are reputable lenders who won’t penalize you for paying off a loan early.

How to avoid Predatory Lenders

For those with low credit scores, a poor history of borrowing, or low income it can be tough to avoid predatory lenders. These are the borrowers that are targeted most frequently. These people have less options for borrowing, as traditional bank loans and credit cards may not be available to them. However, there are still options out there that won’t lead to crippling amounts of debt.

One option would be to borrow money from family or friends. If you know someone who’s able to lend you the cash you need, then you may want to consider pursuing that option. It would be a good idea to treat it like a regular loan and draw up a repayment contract for both parties to sign. If you have an organized and clear plan for returning the money they’ll likely be more willing to provide you with a loan.

Another option is to see if you can join a credit union. Credit unions are like banks, but you have to be a member to take out a loan and use their services. Membership can be obtained based on where you live, where you work, or whether you’re involved in a local church or community organization. If you’re able to get a membership to a credit union, you can find loans with more reasonable rates and terms. Search online for local credit unions and their membership criteria to see if you qualify.

Finally, a safe alternative to predatory lending, is to take out a personal installment loan from a Better Business Bureau-accredited financial institution.

References:

  1. Fay, Bill. “What is Predatory Lending?” Debt.org. Accessed July 18, 2016. Debt.org

  2. “How Payday Loans Work” CFA Payday Loan Consumer Information. Accessed July 18, 2016. PaydayLoanInfo.org

  3. “Car Title Loans” CFA Payday Loan Consumer Information. Accessed July 18, 2016. PaydayLoanInfo.org

  4. “Payday, Title & Lending” National Association of Consumer Advocates. Accessed July 18, 2016. ConsumerAdvocates.org

  5. Lee, Jenna. “The Ugly Truth About Payday, Pawn Shop and Car Title Loans” U.S. News. May 25, 2014. Accessed July 18, 2016. AOL.com