Predatory lending occurs when a lender uses unfair or deceptive tactics to lead a borrower into taking a loan that carries terms that benefit the lender at the borrower’s expense. Predatory lending benefits a lender at the borrower’s expense and is usually deemed illegal practice.
Some predatory lenders may target borrowers with low income and people who are looking for loans with bad credit, but anyone can fall victim to predatory lending if you don’t know the warning signs.
- Predatory lending occurs when a loan is granted to a borrower with unfair terms, at the cost of the borrower, for the benefit of the lender.
- Red flags include shockingly high interest, add-on paid services, and rushed paperwork.
- Before taking out a loan, check that the lender you are considering is trustworthy. You can do this by deferring to the OLA website or SEC register, or checking their status with the Better Business Bureau.
What Is A Predatory Lending Loan?
A predatory lending loan is a loan offered by lenders with unfair, or even sometimes abusive, loan terms. These types of lending practices can cause significant harm and distress to those who fall victim to such tactics. It’s important to understand what qualifies as a predatory lending loan, and to avoid these at all costs.
Predatory lending often uses deceptive and exploitative practices to try and convince borrowers to agree to concerning loan terms, even when borrowers don’t necessarily need the loan, or cannot properly afford it.
Ultimately, predatory lending is defined as a practise that benefits the lender, while ignoring, and often hindering the borrower’s repayment ability.
How Might A Predatory Lender Exploit Their Customers?
It is very important to identify what a predatory lending loan is, but also to identify the red flags that can help you to spot one out. There are a few qualities of predatory lending borrowers should look out for, including the following:
- Sky-high interest rates.
- Add-on services and costs that benefit the lender.
- Rushed paperwork.
- Unnecessary fees for those with low/no credit score.
Watching out for unfair lending practises, such as those detailed below, can help you to better identify predatory lenders, and keep yourself protected from them.
What Are The Warning Signs Of A Predatory Lender?
If The Loan Seems Too Good To Be True!
Be skeptical when a company makes an offer that seems too good to be true.
You may see ads from companies promising to mend your damaged credit, settle your debts for less than you owe or give you a cheap loan despite blemishes in your credit history.
Look for the catch before signing any agreement — the price for speed and convenience may be high fees, getting trapped in a cycle of debt or being forced to give up your assets. See also our guide on how do I know if an online lender is legit or not.
If The APR Isn’t Disclosed
One warning sign of predatory lending is when a company makes it hard to know how much the loan will cost. A consumer-focused lender will be transparent about the total cost of the loan and the APR and payment example will be shown clearly.
When you navigate a company’s website or visit a branch in person, you should easily find all the costs associated with the financial product, including any origination fees, late fees and other charges.
Lenders are legally required to state the loan’s annual percentage rate, which is the sum of the interest rate plus upfront fees. If basic product information is missing or hidden in the fine print, and the lender does not answer your questions, steer clear of the company.
If Getting Approved Seems Too Easy!
A lender that forgoes a credit check before offering you a loan does not assess how you’ve handled debt in the past or the potential impact of taking on more debt.
Predatory lenders make up for that risk by charging high rates, typically well above 100% APR, and structuring loans with high upfront fees.
Such high rates and front-loaded fees are considered predatory by consumer advocates because they add significant costs and make it hard for the borrower to pay back the loan within the given term.
How Can I Find Out If An Online Lender Is Legal And Legit?
There are five easy steps to follow for more peace of mind when choosing the right payday lender:
- Check the site is https://
- Read the Terms and Conditions.
- Check that they have a registered address and phone number.
- Check that they are regulated.
- Check their reviews online.
Needing a loan can be stressful in itself, so you need to make sure that you are using a trusted and legitimate loan company, and not a scam or predatory lender.