Self-Help Articles

How to Avoid Predatory Lenders

When looking for a loan, many borrowers opt for the fastest and easiest way to get their hands on the cash. But that approach might make you prey to predatory lenders. What are predatory lenders, you ask? More importantly, how do you avoid them?

What Are Predatory Lenders?

A predatory lender puts profits above their borrower’s ability to reasonably pay back the loan. For instance, during the Great Recession of 2008, the housing market crashed because predatory lenders began offering mortgages to people who had no chance of being able to make the payments on their homes.

With a credible loan, lenders do a credit check on the borrower and determine how much they can afford in monthly payments. In a predatory lending situation, the lender doesn’t care if the borrower can pay back the loan because they make most of their money from extraordinarily high-interest rates, unnecessary fees, and repossessing the assets of borrowers who can’t repay.

If you’re looking for a loan – and don’t want to become prey to predatory lenders – here’s what to look for.

Who Is Vulnerable to Predatory Lending?

Unscrupulous lenders target certain segments of the population when looking for victims of their unsavory loan practices. The most vulnerable tend to be:

• Low-income families. Low-income families are often hit up by payday loan lenders, car title loan lenders, and personal loan companies that target low-income housing areas with high-interest loan offers. 
• Subprime borrowers. If someone has a low credit score – say, below 630 – their chances of getting a traditional loan are slim. That’s why predatory lenders promise these borrowers the moon. Unfortunately, after the paperwork is signed, many borrowers realize that the promises were not reflected in their loan terms. 
• People in a financial storm. When disaster strikes, it can throw people into a financial whirlwind – and that’s when predatory lenders like to step in. Whether the person has just lost their job, experienced a health disaster, or had an emergency home repair, predators take advantage of the rush for cash to get borrowers to sign for a bad loan.
• The elderly. For someone on a fixed income, any emergency or unforeseen expense can put them in a financial tailspin. Predatory lenders know this and make offers to the elderly that sound appealing but actually rob them (and their heirs) of their home equity.
• The military. Service members often have financial challenges, and predatory lenders are notorious for taking advantage of them. Many military members are young with no credit history, and they move around a lot, so they have difficulty getting approved for traditional loans. (Ever wondered why predatory lenders like car title loan offices and payday loan sites set up shop near military bases?)

What Does a Predatory Loan Look Like?

It’s important to research all the terms of any loan you consider. Here are some of the tactics that predatory lenders use. If your potential lender uses any of them, walk away before you fall victim.

• “It just can’t be real.” If your credit score is awful and a lender offers you a loan with great terms, it’s probably too good to be true. Predatory lenders often hide the real terms of a deal – like an interest rate that will double or triple after three months. 
• No bottom line. Credible lenders will supply a rate sheet that outlines all the fees and interest rates you will pay over the life of the loan. Predatory lenders don’t want to show you their numbers, so they will go out of their way to hide them.
• High interest rates. If you have bad credit, you can expect to pay up to 36% in interest, but some predatory lenders go way beyond that. In fact, it’s not uncommon for payday lenders to charge interest rates of 400%. 
• Exorbitant fees. Loans typically come with fees, but if you’re doing business with a predatory lender, those fees are often excessive. If a lender tells you that you must purchase expensive insurance from them to get a loan, you’re likely talking to a predatory lender. These types of lenders also charge steep prepayment penalties and other fees.
• No credit check. If a lender doesn’t check your credit, it’s a signal that they don’t care whether or not you’re able to repay the loan. That’s a sure sign of a predatory lender.
• No checks allowed. You should have a choice about how you pay your bills, but some predatory lenders require you to pay them with an automatic withdrawal from your bank account. That means they can attempt to withdraw even if your account is overdrawn, resulting in multiple overdraft fees for you.
• Incomplete paperwork. Before signing any financial document, you should know exactly what the terms are. But some predatory lenders will ask you to sign the paperwork before all the blanks are filled in, leaving you in a vulnerable position. After all, they can fill in those blanks however they see fit after you’ve signed.
• No time for questions. Predatory lenders won’t answer many questions because they know that if you understand the terms, you won’t sign. That’s why they’ll try to rush you through signing the documents.

What Are the Consequences of Predatory Lending?

Sure, it’s easy to get quick cash from a predatory lender, and you might think the risk is worth it to solve your financial problems. But there are serious consequences to working with a predatory lender.

• A lower credit score. When you default on the loan, the lender will report it to the credit agencies, and that will lower your credit score. This will not only affect your ability to get a loan from a credible lender in the future, but your lower credit score could also prevent you from getting a job or renting a home. 
• A likely default. When you take out a loan that you’re not qualified for (remember, predatory lenders don’t check your credit score or determine how much you can afford), chances are high that you’ll default on the loan.
• A never-ending cycle. For many people, the only way out of the financial hardship of a predatory loan is getting another one… and so on. This is known as a debt trap, and once you’re in it, it’s almost impossible to get out of it. 
• Forfeiture. If you put your car or house up as collateral and can’t repay the loan, the lender has the right to foreclose on your home or repossess your car.

If you have questions about whether or not a lender you are speaking with is predatory, contact the friendly agents at American Credit Foundation before you make a commitment. We’re here to help you make the best decisions when it comes to finding a loan that works for you.