How to Avoid Predatory Lending

When you need a loan, you want funds as quickly and easily as possible. But if a loan seems too good to be true – offering rapid approval and fast cash – beware. It might be a predatory loan.
 
These loans seem like a great solution in the moment. But they can leave you with debt that’s nearly impossible to repay.

What Is Predatory Lending?

Predatory lenders take advantage of consumers. They use deceptive tactics to trick borrowers into taking loans that aren’t fair. They might have sky-high interest rates, for example, or include excessive fees for services the borrower doesn’t need. As a result, these loans end up being very expensive.
 
Predatory loans tend to target vulnerable groups like seniors and people with low incomes, but anyone can fall for a predatory lending scheme.

Why It Is Important to Understand Predatory Lending

Predatory loans are loaded down with high interest rates and fees, so the costs of that loan keep climbing. That can make them difficult to repay.
 
When you get one of these loans, you might need to give the lender your bank account information. Then if you don’t have enough money to make your loan payment, the lender might try – again and again – to withdraw funds from your account. Each time they do, the bank will charge you an overdraft fee.
 
If you default on the loan, it can damage your credit. The lender may even try to take you to court.
 
Borrowers who have taken out predatory loans often struggle to keep up with their loan payments. So their financial goals, such as building savings, fall by the wayside. Some predatory loan contracts use the borrower’s home as security, causing victims to lose their homes.

Common Predatory Loan Practices

Here are some common loans that are predatory or target more vulnerable borrowers:

• Payday loans are small, short-term loans that need to be repaid on your next payday. The interest charge can be as high as 30%, according to the Consumer Financial Protection Bureau. That means a $500 loan could quickly become a $650 loan. If the borrower can’t repay the loan plus interest, more fees are added. This can trap the borrower with debt that grows out of control.
• Car title loans are short-term loans that use the title of the borrower’s car – or truck, or motorcycle – as collateral. The finance fee can be as high as 25%, according to the Federal Trade Commission. So in just a month, a $2,000 loan could balloon to $2,500, plus any other fees in your loan contract.
• Subprime mortgages are usually offered to homebuyers who have low credit scores. They are often adjustable-rate mortgages (ARMs) that have a low interest rate at the start. But after a few years, that interest rate rises.
• Buy now, pay later purchases allow online shoppers to buy an item with instant credit, without having to undergo a rigorous credit check. The customer simply clicks on a special button on the retailer’s website to pay some of the item’s cost upfront – perhaps 25% of the purchase price – and pay the rest later, in installments. If the buyer pays on time, all is well. But if they don’t, they’ll be penalized with interest charges and late fees.
• ITIN mortgage loans, unlike traditional home loans, don’t require a social security number. Instead, borrowers can use their individual taxpayer identification number (ITIN). These loans provide immigrants, for example, a path to home ownership. But they come with higher interest rates than a typical home loan.

Protection for Consumers

The US Attorney’s Office has made it a priority to prosecute predatory lenders and educate the public about their tactics.

How to Spot Predatory Lending Practices

Keep an eye out for these common predatory practices.

• Pressure tactics. If someone like a telemarketer or a door-to-door salesperson reaches out to sell you a loan, that’s a red flag. Also be wary of anyone who pressures you to sign for a loan.
• Quick approval. Avoid doing business with lenders who promise lightning-quick approval or say that your credit rating doesn’t matter.
• Advice to take out more credit that you need. A lender who urges you to take on more debt than necessary doesn’t have your best interests at heart.
• Balloon payments. A loan may require a series of regular payments with a big “balloon payment” due at the very end. That big payment could be beyond your reach.
• High interest rates or fees. Read the loan contract to make sure you’re comfortable with the interest rate, fees and any penalties for late payments.
• Prepayment penalties. If you’re able to repay your loan early, you should be able to do so without having to pay a fee.
• An incomplete or confusing loan contract. If you don’t understand the loan paperwork, ask for clarification. The terms should be made clear, in writing.
• A contract with blank space. Predatory lenders may rush you to sign a contract, offering to fill in the blank lines for you later.

Report Predatory Lending

If you’d like to report a predatory lender or product, contact the Consumer Financial Protection Bureau and they’ll contact the lender on your behalf. Call 855.411.2372 or make a report online.
 

 

Sources:
National Association of Consumer Advocates, “Predatory Lending,” accessed on September 26, 2024
 
American Bankers Association, “Avoid Abusive and Illegal Lending,” accessed on September 26, 2024
 
Consumer Financial Protection Bureau, “What Is a Payday Loan?” published May 28, 2023
 
Federal Trade Commission, “What You Need to Know About Payday and Car Title Loans,” accessed on September 26, 2024
 
Consumer Financial Protection Bureau, “What Is a Subprime Mortgage?” published February 2, 2023
 
American Predatory Lending, “Subprime Lending,” accessed on September 26, 2024
 
Stanford Graduate School of Business, “The Hidden Costs of Clicking the ‘Buy Now, Pay Later’ Button,” published February 2, 2024
 
American Bankers Association, “Avoid Abusive and Illegal Lending,” accessed on September 26, 2024
 
My Home with Freddie Mac, “Spotting and Preventing Predatory Lending,” accessed on September 26, 2024
 
Consumer Financial Protection Bureau,
“Submit a complaint about a financial product or service,” accessed on September 26, 2024
 
Urban Institute, “ITIN Mortgages: Barriers and Opportunities to Advance Latino Home Ownership,” published February 2024
 

 
This article was created in accordance with the Patelco editorial policy.