When most people think of predatory lending, they think of payday loans. And while payday loans are certainly one form of predatory lending, there are many others. In fact, any type of loan that takes advantage of someone who is financially vulnerable could be considered predatory.
So what exactly is predatory lending? How can you identify a predatory loan? And what can you do to avoid getting scammed by a predatory lender?
In this article, we’ll answer all of those questions and more.
What Is Predatory Lending?
Predatory lending is a type of lending that takes advantage of a borrower’s lack of knowledge or desperation. Predatory lenders typically target people struggling to make ends meet or who have bad credit.
They may promise low-interest rates or easy payment terms, but the truth is that their loans often come with high fees and interest rates.
This can make it very difficult for borrowers to repay their loans, and they may end up trapped in a cycle of debt. Predatory lending is harmful to both individuals and the economy, and it is important to be aware of its dangers.
If you’re considering taking out a loan, do your research and only work with reputable lenders. Predatory lending is a serious problem, but it can be avoided if you know the signs.
What Are the Signs of a Predatory Loan?
There are several signs that a loan may be predatory. Some of the most common warning signs include:
#1. High-interest rates and fees
Predatory lending is a serious problem that can have long-lasting repercussions. In short, predatory lending is when a lender offers a loan with high-interest rates and fees, making it difficult or impossible for the borrower to repay the loan.
This can result in the borrower being trapped in a cycle of debt, damaging their credit score. Predatory lenders often target people in desperate situations, such as those who have poor credit or face foreclosure.
Predatory lending is illegal in many states, but that doesn’t stop some unscrupulous lenders from engaging in this practice.
If you’re considering taking out a loan, do your research and only work with reputable lenders. Predatory lending can ruin your finances, so it’s important to be aware of the signs.
#2. Unaffordable payments
Predatory lending is a problem that affects millions of Americans every year. Predatory lenders target people who are desperate for money and who may not be able to get a loan from a traditional lender.
These lenders charge high fees and interest rates, making it difficult or impossible for the borrower to repay the loan. As a result, people who take out predatory loans often find themselves in a cycle of debt that can be difficult to break free from.
Predatory lending is a serious problem that can have devastating consequences for borrowers. If you consider taking out a loan, do your research and only work with reputable lenders.
#3. Predatory terms and conditions
Predatory terms and conditions take advantage of consumers by trapping them into paying hidden fees or exorbitant interest rates. Predatory lenders will often target those already in a vulnerable financial situation, such as those with bad credit or low incomes.
These lenders may offer loans with terms that seem attractive at first but are very costly in the long run. For example, a lender may advertise a “low-interest” loan, but the fine print may reveal that the interest rate is actually much higher than advertised.
Or, a lender may charge hidden fees that inflate the loan cost. Predatory terms and conditions can leave consumers feeling overwhelmed and trapped, so it’s important to be aware of these tactics before taking out a loan.
#4. Sticky contracts
Predatory lending is a term used to describe some lenders’ unfair, deceptive, or fraudulent practices during the loan origination process. Predatory lenders typically target minority and low-income borrowers and those with limited credit histories.
These borrowers are often lured in by promises of low-interest rates or easy approval, only to find out later that their loan terms are much less favorable than they originally thought. In some cases, predatory lenders will even go so far as to hide important information in the fine print of a contract, making it extremely difficult for borrowers to understand the true cost of their loan.
If you find yourself in a sticky situation with a predatory lender, it’s important to remember that you have rights. You should never feel pressured to sign a loan contract that you don’t fully understand.
#5. Widespread complaints from borrowers.
Many borrowers have complained about the predatory practices of some lenders. These borrowers often feel trapped by the high-interest rates and fees and their loans’ hidden terms and conditions.
Predatory lenders often take advantage of people in vulnerable financial situations, and many borrowers feel like they have no choice but to accept their loan terms.
#6. It’s surprisingly straightforward to get approved.
It’s surprisingly straightforward to get approved for a loan with a predatory lender. These lenders often target people in a vulnerable financial situations, so they may be more likely to support your application.
However, be aware that the terms of these loans can be very costly in the long run. If you’re considering taking out a loan, do your research and only work with reputable lenders.
Here is the summary of what I have written so far:
- Predatory lending is a serious problem that can have devastating consequences for borrowers.
- Predatory lenders often target those already in a vulnerable financial situation, such as those with bad credit or low incomes.
- These lenders may offer loans with terms that seem attractive at first but are very costly in the long run.
Example of predatory lending.
Here are 11 examples of predatory lending:
1. Emphasizing the Payment
Predatory lending is a type of financial scam where lenders take advantage of unsuspecting borrowers by offering them loans with terms that are impossible to meet.
In many cases, the lender will emphasize the monthly payment rather than the total amount of the loan, making it seem like the borrower can afford the loan when they can’t.
This type of lending can cause borrowers to fall behind on their payments and ultimately lose their homes.
2. Balloon Loans
Balloon loans have come under fire for being predatory because they typically involve high-interest rates and short repayment periods.
As a result, borrowers often owe more money than they can afford to repay. Predatory lenders offer to “rollover” the loan into a new one with even higher interest rates.
This can create a dangerous cycle of debt that can be very difficult to break free from. If you’re considering taking out a balloon loan, it’s important to be aware of the risks.
3. “Teaser” Rates
Some predatory lenders will offer what’s known as a “teaser” rate to lure in potential borrowers.
A teaser rate is an introductory interest rate that is lower than the actual rate of the loan. This can make the loan seem more affordable than it is.
However, the interest rate will increase after some time, often dramatically. This can leave borrowers struggling to make their payments and ultimately defaulting on their loans.
4. Hidden Fees
Predatory lenders will often hide fees in the fine print of a loan contract to make more money off the borrower.
These fees can include origination fees, application fees, and even closing costs.
Borrowers may not realize they’re being charged these fees until it’s too late. As a result, they pay more money than they ever anticipated.
“Packing” is a term used to describe when a lender includes additional products or services in a loan that the borrower doesn’t need or want.
For example, a lender may try to sell you unnecessary insurance products or push you to open a new account with their bank.
Packing can end up costing borrowers more money in the long run.
6. Large Mortgage Broker Payment
The lender, not the borrower, pays mortgage brokers. However, some predatory lenders will inflate the broker’s commission to make more money off of the loan.
This results in the borrower paying a higher interest rate on their loan.
7. Prepayment Penalties
Some lenders will charge a fee if you try to pay off your loan early. This is known as a prepayment penalty.
Predatory lenders will use this to trap borrowers in their loans for longer periods.
8. Negative Amortization
Negative amortization occurs when the monthly payments on a loan are not enough to cover the accruing interest.
As a result, the borrower’s debt grows larger over time. This can make it very difficult for borrowers to get out of debt.
9. Interest-Only Loans
Interest-only loans are another type of loan that can be predatory. With these loans, borrowers only have to make payments on the interest for a certain period.
After that, they would then have to start paying off the loan’s principal. However, many borrowers find that they can’t afford the higher payments when that time comes.
10. Adjustable-Rate Mortgages
Adjustable-rate mortgages (ARMs) can be predatory because they often have low introductory rates.
However, after a certain period, the interest rate on a loan can increase significantly. This can make it difficult for borrowers to make their payments and ultimately lead to foreclosure.
11. Payday loans
Payday loans are short-term loans that are typically due on the borrower’s next payday.
They often have high-interest rates and fees, making them very expensive for borrowers.
Additionally, many payday lenders require borrowers to give them access to their bank account so they can withdraw the amount of the loan plus fees directly from their account.
This can lead to borrowers having their accounts overdrawn and incurring even more fees.
12. Title loans
Title loans are another type of loan that can be predatory. These loans use the borrower’s car as collateral.
If the borrower can’t repay the loan, the lender can repossess the car.
Title loans often have high-interest rates and fees, making them very expensive for borrowers.
“Flipping” is a term used to describe when a lender encourages borrowers to refinance their loans multiple times. Each time the borrower refinances, they have to pay fees and closing costs.
This can cost borrowers a lot of money in the long run.
How to spot a good lender?
When looking for a lender, it’s important to do your research to ensure you’re getting the best deal possible.
Here are some things to look for:
1. A good interest rate: Interest rates will vary from lender to lender. Be sure to shop around and compare rates before deciding on a lender.
2. Low fees: Some lenders will charge higher fees than others. Be sure to ask about any fees before you agree to a loan.
3. Flexible repayment terms: You should have some flexibility in repaying your loan. Make sure you’re not locked into a rigid repayment plan that could be difficult to stick to.
4. Good customer service: You should feel confident in your lender’s ability to help you through the loan process. If you have any questions or concerns, they should be able to help you.
5. A good reputation: Check out online reviews of potential lenders. See what others have said about their experience with the lender.
How to Avoid Getting Scammed by a Predatory Lender?
Here are some things to keep in mind to help you avoid getting scammed by a predatory lender:
1. Be wary of loans that seem too good to be true: If a lender is offering you a loan with terms that seem too good, they probably are.
2. Do your research: You know everything you can about a lender before you agree to work with them.
3. Don’t rush into anything: Take your time to consider all of your options before you agree to any loan.
4. Ask questions: If you have any questions about a loan, ask the lender before you agree to anything.
5. Know your rights: Familiarize yourself with your rights as a borrower. This will help you spot any red flags that might indicate you’re being scammed.
What you can do if you’re a victim of predatory lending.
If you think you’ve been the victim of a predatory lender, there are some things you can do.
1. File a complaint: You can file a complaint with the Consumer Financial Protection Bureau or your state’s attorney general.
2. Contact a lawyer: You may want to contact a lawyer to discuss your legal options.
3. Refuse to pay: You can refuse to pay the loan if you believe you’ve been the victim of predatory lending. This could result in the lender taking legal action against you, but it’s worth considering if you feel you have no other options.
4. Speak up: If you know someone considering taking out a loan from a predatory lender, speak up and let them know what could happen.
5. Spread the word: Help spread the word about predatory lending so others can avoid getting scammed.
The article provided information about predatory lending and how to spot it. The post also included some things you can do if you’re a victim of predatory lending. In addition, the blog post contains tips for avoiding getting scammed by lenders who may be engaging in practices that are considered “predatory.”
If this is something you’re interested in learning more about, be sure to check out the resources included at the end of this post.
You can also share this blog post with others to help spread the word about predatory lending.
Thank you for reading!
- Shivani is a personal finance expert who covers topics from credit cards to travel rewards. She's featured in Prestige Magazine and passionate about helping readers make responsible financial decisions. Based in New Delhi, she travels as a digital nomad, sharing her knowledge worldwide.