Predatory loans are consumer loans geared to low-income Americans who are hard up for cash, and are charged ultra-high interest rates, fees and penalty charges to obtain the predatory loan.
Predatory loans are marketed to consumers who really don't have any legitimate loan alternatives, and who eventually wind up taking a predatory loan with unrealistic paydown terms, sky-high interest rates, and mounting fees and penalty-based charges.
Predatory loans, by and large, set up borrowers for failure. They not only come with significantly higher interest rates than regular loans, but they also burden borrowers with high fees, often come from shady loan operators, and come with contracts that offer severe financial penalties to borrowers who don't meet the excessive terms of the loan.
Mostly, predatory lenders target the poor, minorities, the elderly, and Americans with little or no formal education.
Predatory loans are also geared toward desperate individuals who need quick cash for a medical emergency, to pay the rent, or even to put groceries on the table. Mostly, these borrowers have poor credit, may be jobless or underemployed, or have recently been laid off. When these borrowers can't get a loan in a conventional way, they may feel they have no recourse but to turn to a predatory lender.
Make no mistake, predatory lending is a big problem in the U.S., with study after study detailing the negative impact abusive lending practices have on the most vulnerable Americans.
Predatory lenders are also highly aggressive in marketing predatory loans to vulnerable, low-income Americans. Predatory loans are shilled on television ads, online ads via email, on social media, and even door-to-door pitches, targeting borrowers who can least afford the loans.
Borrowers who are targeted by predatory lenders often feel like they have no choice but to sign on to a loan, as they traditionally have trouble getting approved for a conventional loan. Predatory lenders know this, and get even more aggressive about marketing high-interest, high-fee loans to low-income Americans.
Examples of Predatory Lending
There is no shortage of predatory lending examples, as unethical lenders have found multiple ways to fleece unsuspecting borrowers. These examples are at the top of the list:
Monthly Payment Loans
These loans are among the easiest loans for predatory lenders to sell, primarily because the hook resonates so strongly with consumers.
Here's the deal. With payment-based loans, predatory lenders are able to focus the borrower's attention on the monthly payment and not the total loan payment. Emphasizing that a loan will cost $199 per month instead of $15,000 is a much easier sell for low-level lenders - but that's exactly why they do it.
Balloon Payment Loans
Predatory lenders are known to push so-called balloon loans (especially with mortgages) that start with lower, easier-to-pay terms, then "balloon" into much bigger payments later on. If the borrower can't make the larger payments, he or she can easily default on the loan, and have to take out another loan to meet the original loan payments.
Some predatory loans come with what lending industry professionals call "negative amortization." That means a loan with monthly loan payments so minuscule they don't even cover the loan's interest. Soon, the borrower finds himself paying back way more than he borrowed on the loan.
Stacking and Packing Loans
These loans are another favorite among predatory lenders. With packing loans, lenders "pack" the loans with loads of fees, charges and penalties that could trigger extra fees and charges - and try to hide the extras in the loan contract's fine print. While the lender gets the extra items and charges into the loan, that doesn't mean the borrower is getting a better loan product - because they're not.
These predatory loans are among the most pervasive, and the costliest, loans that can dig deep into the borrower's pocketbook. Payday loans are geared toward low-income borrowers who require instant cash to make the household budget work. The "payday" part of the loan means the borrower is expected to pay back the loan by his or her next payday, and with skyrocketing interest rates of 100% or more tacked on to the loan cost. Some payday lenders have been known to charge as much as 900% on a payday loan, which for many borrowers is virtually impossible to pay back.
How Can Predatory Lending Be Avoided?
Predatory loans do come with red flags that should grab the attention of borrowers and send them running in the other direction.
These are some of the most common warning signs that come with predatory loans, and what to do about them once uncovered:
Ultra-High Interest Rates
Many predatory loans come with excessively high-interest rates, often at triple-digit levels. Some payday loans, for example, can come with interest rates that are 100% or higher.
If you're considering a high-interest payday loan, reading the contract's fine print is a must. If necessary, a have a trusted friend, relative or even your local banker read the contract for you, and point out any potential problems.
Extra Fees and Costs
Predatory loans also tend to come with multiple add-on fees and charges, as lenders look to bundle extra costs into the loan and count on the fact that borrowers won't notice.
For example, a predatory lender may insert credit insurance on auto or personal loans, or try to add high service fees for a mortgage loan. Often, the lender will insist the charges be included in the loan, on a "take it or leave it" basis.
If this scenario comes to pass, let the lender know you can't abide by those terms, and are walking away from the deal. A reputable lender will back off, peel away some or all of the more onerous fees, and try to cut you a better deal.
Low Credit Score Fees Predatory lenders will also insert extra fees for vulnerable borrowers with low credit score, and as a result, have few borrowing alternatives.
Paying extra in the form of higher interest rates for poor credit is a fact of life for low-credit consumers. But unethical predatory lenders will add extra fees just for applying for a loan if you have a low credit score. Or even worse, the lender will reject the original application for a low credit figure, then offer to grant the loan if the borrower agrees to extra charges.
Your best bet here is to work on your credit score, check it for accuracy and upgrade it where possible, and then try to get a mainstream loan from a trusted financial institution. (You can get a free copy of your credit score once a year from each of the three main credit bureaus - Experian (EXPGY) , Equifax (EFX - Get Report) and TransUnion (TRU - Get Report) - at Annualcreditreport.com or from the credit bureau directly.)
Your Borrower Wants to "Secure" Your Loan Predatory lenders may only agree to grant a loan if the borrower agrees to attach a valuable financial asset, like home equity or an auto ownership title. If, for whatever reason, the borrower can't keep up with the loan payments, the lender can cancel the loan and keep the secured asset, putting the borrower in further financial peril.
Never, ever agree to put your car or home equity up as collateral for a loan. Better to back off, look for a better loan deal that doesn't demand the securing of a financial asset. There's too much risk that you'll lose the asset, making your personal financial situation even more perilous.
There's High-Pressure to Close a Loan Predatory lenders are also known to try and rush a borrower through the loan process, putting an expiration date on the loan offer.
They do so to keep borrowers from taking the time to thoroughly review the loan, and thus miss the high fees, penalties and charges that come with onerous loans.
If your lender is pushing you to close on a loan before you're ready to sign on the dotted line, it's best to walk away, as your best interests aren't being served.
You're Not Offered a Full Loan Disclosure
Unscrupulous lenders will often try to get borrowers to sign off on a loan without offering proper loan disclosure, or even lie or omit critical information from borrowers.
By law, lenders are mandated to provide borrowers with a complete loan disclosure that includes the full story on interest rates, fees and penalties (especially late payment fees, which can be especially expensive), and any other additional costs.
If your lender won't provide these details, walk away from the loan - there's a good chance the lender is trying to swindle you.
They Ask You to Lie
To clear regulatory hurdles, some predatory lenders will ask borrowers to lie or misrepresent themselves to pass lending criteria and get a loan. If you're unemployed they may ask you to say you're self-employed or urge you to up your annual income to qualify for a loan - both are considered fraud.
Asking you to lie is a big red flag that your lender is in predatory mode and that lender should be avoided and should even be reported to law enforcement authorities (see contact information below.)
Guarding Yourself Against Predatory Lenders
There's no better way to protect yourself from predatory lenders than to learn as much as you can about loan terms, interest rates, payment timetables, and your state's rules and regulations on financial lending practices.
If you're taking a loan, make sure to read the fine print, take your time in reviewing the loan contract, and give a wide berth to any lender who wants you to fudge the facts on your application or who makes excessive promises you suspect can't be met.
For alternative sources to predatory loans, focus on working with your local bank or credit union. One popular alternative to a payday loan, for example, is a payday alternative loan (PAL) which can be obtained through the federally-recognized National Credit Union Association. Loans can be had for up to $1,000 and the borrower must be a member in good standing for at least one month.
Do all that, and you'll vastly increase your odds of steering well clear of predatory lenders, and keep you and your financial assets out of hot water.
How to Report a Predatory Loan
The U.S. government, via the Federal Deposit Insurance Corporation, offers multiple ways for consumers to report fraudulent and shady predatory lending practices.
You can do so through the following FDIC channels:
Toll-Free Number: 1- 877-275-3342 (1-877-275-ASK-FDIC)
Federal Deposit Insurance Corporation
Consumer Response Center
1100 Walnut St, Box #11
Kansas City, MO 64106
File a complaint: https://ask.fdic.gov/FDICCustomerAssistanceForm/
The FDIC's Consumer Response Center requires the following information when filing a predatory lending complaint:
- Full bank name, city, and state where the bank, financial institution or lender is located;
- Type of product involved (i.e., checking account, mortgage loan, Certificate of Deposit, etc.);
- Detailed explanation of the issue including events in the order in which they occurred, names and phone numbers of individuals involved, amounts and dates of any transactions, and any other information that will enable us to thoroughly understand your concerns;
- Description of the resolution you seek; and
- Copies (do not send original documents) of all pertinent documentation relevant to your complaint. Any supporting documentation such as contracts, account statements, receipts, or any correspondence with the bank may be mailed or faxed directly to the FDIC.
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