People desperate for loans in tight economic times are easy prey for predatory creditors. These unscrupulous lenders target consumers who have a limited ability to repay the loans, such as the elderly, people with limited education, those with weak credit histories, and other low-income groups. They extract as much money as they can from these individuals and then ruin their credit rating when the borrower can no longer pay their exorbitant fees and interest rates.
New schemes to separate desperate borrowers from their hard-earned money are cropping up every day. These creditors use deceit, manipulation, sales pressure, and even fraud to get their victims to sign up for the loans they are pushing. Here is how to recognize and avoid predatory loans.
Very High Interest Rates
Predatory loans generally have sky-high interest rates, often much higher than you would get with a credit card. Most people associate predatory lending with payday loans and subprime mortgages, but the practice can be found with any type of loan, including home improvement, auto financing, car title, and tax refund anticipation loans. If the interest rate that you are quoted for the loan is higher than 25%, there is a good chance that you are looking at a predatory loan.
Some large, reputable banks also offer high-cost, short-term payday loans at terms just as bad as you would find at a regular payday lender, so don’t be fooled into thinking that predators only lurk in back-alley storefronts or on flashy websites. The short-term, high-interest loans that are offered by these banks can have an annual percentage rate in the triple digits. All high-cost, short-term loans trap people and are designed to make borrowers come back over and over for more loans, so it is best to steer clear of these loans.
Other Red Flags
Most predatory loans have easily recognizable red flags. If the lender allows you to borrow more money than you can afford or tells you that having bad credit is not a problem, it is generally a sign that the loan they want you to sign for is predatory. If the documents that you are asked to sign contains blank spaces or the lender tells you not to worry about reading the fine print, you should recognize that they are not working towards your best interests.
You should also be suspicious if the lender asks you to make false statements on your loan application. Be wary of any lender that charges excessive fees or penalties if the loan is refinanced or payment is late or adds unnecessary insurance or financial products to the loan. If you can learn to recognize these red flags, you will significantly reduce the chances that you will become a victim of a predatory loan.