A predatory lender is one that uses deceptive lending practices in order to trap borrowers into a cycle of debt. The practices may include enormous interest rates, hidden fees, or other unfair terms.
What Is Predatory Lending?
As the number of people experiencing financial difficulties increases, our unawareness about the exploitation of financial resources by “predatory lenders” becomes strikingly obvious. Research recently done by the Coalition for Responsible Lending estimated that US citizens lose up to $9.1 billion annually because of predatory lending practices. So, how can we protect ourselves from predatory lenders, especially when their enticing offers seem to arrive at just the right moment?
Predatory lending is often defined as any way that a creditor might persuade a borrower to take out a loan that has inconvenient or financially undesirable terms.
The “financially undesirable” part of the definition means that the borrower’s ability to repay the loan is hindered by the terms of the loan itself. High APRs may be considered unreasonable, especially compared to lower APRs offered by many banks for similar loans.
For most borrowers, it’s easy to forget to look into the possible downsides of taking out such a loan when you desperately need quick cash. This is exactly what predatory lenders seek in potential clients — the unwillingness or inability to do research or shop around.
You could even end up trapped in a cycle of debt, having to rollover loans on a continuous basis. This cycle will often lead to severe financial consequences, including reducing your credit score. Such a result may ultimately lead to being unable to take out a loan under more favorable terms in the future.
If the debt involves a home mortgage, the borrower’s house might be taken by the lending business if they default. This is true of other types of secured debt, too.
Who Can Be A Predatory Lender?
Any lender that forces unsuspecting borrowers who have little to no financial education into transactions with unfavorable terms can be considered a predatory lender. They can range from mortgage brokers, improvement contractors, real estate brokers, and even attorneys.
Lenders using predatory practices will often assess a client based on the equity in their possession, rather than the borrower’s actual capability to pay off a loan in a timely fashion.
What Are The Most Common Types Of Loans Offered by Predatory Lenders?
Some of the most common varieties of loans that a predatory lender might offer include the following.
Tax Refund Loans
Tax refund loans are issued by the IRS annually to consumers who have paid too much into the government to cover their income tax obligation. A tax refund loan will provide you with money before you get your refund, and the lender will take your refund instead of giving it to you. While the loan may be beneficial, the borrower must suffer through fairly high fees, which means that these loans give you only a portion of your tax refund rather than the entire amount.
Car loans can be the result of a lender who takes advantage of a consumer who needs to have a vehicle to get to work or take their kids to school. They may charge very high interest rates, have large fees, and very little leeway for late or missed payments. Car loans function similarly to home mortgages in that you might lose your property if you cannot make the car payments.
How Do Predatory Lenders Attract Customers?
One of the primary reasons that predatory lending is successful is pure psychology. Their entire business revolves around the harmful nature of persuasion.
Predatory lenders often target potential clients in the most financially vulnerable moments of their lives — when they have lost their job, have to pay for a huge medical bill, need to send their kids to college, or when their credit score has gotten too low for them to get loans in a conventional manner, such as from a reputable and trusted bank.
These lenders then begin drawing the client into working with them by bombarding them with advertisements promising not to dig into their credit history, requiring less documentation for loan approval, or offering adjustable interest rates that gradually surpass the amount they were loaned multiple times.
Emotionally distressed and unaware clients are, in turn, commonly blinded by the seemingly generous offer. Instead of taking the time to thoroughly examine the details of the deal, they quickly sign the contract with the lender and fall victim to a well-devised scam designed to take their money when they are the most vulnerable.
How Can I Protect Myself?
Keeping your eyes wide open for signs that a particular lender’s proposal is unreasonable will certainly help your financial safety. By being on the lookout for predatory lending, you are also protecting yourself once you step into the process of getting a loan, as well.
The list below will help you spot signs that you may be dealing with a predatory lender. Use this information to protect your financial well-being from their potentially harmful practices:
Remember: Insisting Does Not Mean Caring
Don’t be seduced by the fact that the sales representatives send you emails or come to your door. Just because they contact you frequently does not mean that they have your best interests in mind.
These upfront practices are commonly employed by predatory lenders. Ensure you steer clear of doing business with lenders that do not require a thorough review of your credit history before they approve your loan.
If there is no meaningful approval process, then they are probably on the lookout for the opportunity to exploit your need for quick cash with unreasonably high interest rates and additional fees.
Keep an Eye Out for Loan Packing and Contract Phrasing
One of the most common indicators that you’ve entered the murky waters of predatory lending is loan packing. Loan packing is the practice of adding several unnecessary costs related to your loan. They might include things like:
- Loan insurance
- Agreement closing costs
- Document preparation fees
These costs really do nothing but increase the lender’s profits. They may not even incur these costs as part of preparing your loan.
Although these fees are usually mentioned somewhere in the fine print of a contract document, the lender might use various forms of unclear wording to confuse the benefits and the costs of the contract for you as a borrower.
One example is using the word “may” instead of “will” or “shall” within the contract. This wording makes it seem like certain fees and additional costs might not apply to your situation. The obvious solution is to be on a lookout for this sort of phrasing within the contract. Paying attention to the exact wording might help preserve your financial well-being.
Disclosure and Evaluation of Information Is Crucial for Safe Borrowing
It is undoubtedly useful to closely monitor the lender’s behavior while they attempt to negotiate a deal with you. Anxiousness to seduce you into signing a contract or attempts to modify the initial offer during the negotiation process are signs that something is probably off.
If the lender doesn’t seem to be disclosing full and true information related to the terms of the loan pay-off, including additional fees, or if the general risk assessment of the loan doesn’t make sense, you should think twice before putting pen to paper on the agreement.
When in Doubt, Ask for Advice
You can ask a trusted friend or, even better, a lawyer to go through the contract and inspect it for possible issues. You can also do some online research to determine if other people have had good experiences with this particular lender or business. You can use different internet forums; these generally serve as good references that discuss client experiences with the lender.
A good place to start might be the Consumer Financial Protection Bureau’s complaint database or your state Attorney General’s office, especially if you think you’ve already stepped into a loan pay-off scheme that runs the risk of draining your funds.
Is There Any Legal Protection For Consumers?
There are several laws that protect consumers from the harmful tactics of predatory lending used to persuade you to get a loan with unfavorable terms.
One such law is the Truth in Lending Act (TILA), which requires lenders to disclose all terms that apply to consumer loans, like credit cards and personal loans. There is also the Homeowners and Equity Protection Act (HOEPA), an amendment to the TILA that discourages predatory lending regarding home mortgages and home equity loans or lines of credit.
The Fair Housing Act also helps protect minorities’ rights regarding housing and lending as well. It is a valuable tool in stopping predatory lenders from drawing unsuspecting clients into a scheme of never-ending debt. Under the Fair Housing Act, even cities have the lawful right to sue predatory lenders if such a scenario is in place.
With CreditNinja, you don’t need to worry about falling victim to predatory lending. We take pride in thoroughly reviewing each and every term with our customers. That way, we make sure that they understand the contract before moving forward with finalizing the loan deal.
If you are currently on the lookout for a personal loan to help your finances immediately, start your application today without affecting your FICO credit rating and receive the principal amount as soon as the following business day.