As the name suggests, predatory lenders prey on susceptible borrowers. The specifics of the loan might be technically legal, but predatory lenders offer vulnerable people access to funding at exorbitant rates.
It may be hard to leave the vicious cycle of debt after predatory lenders trap you in a loan.
Characteristics of predatory lending
High interest rates and fees
Predatory lending is exactly what it sounds like. Unscrupulous lenders use unethical tactics to entice and mislead vulnerable borrowers into taking out a loan that will often cause financial damage to the borrower. Specifically, borrowers are frequently unable to reasonably repay the loan or must pay back the loan at an extremely high interest rate.
In many cases, predatory lenders take advantage of a borrower's strained financial situation or lack of financial acumen. When the right pressure is applied, many unsuspecting borrowers get pushed into taking out a loan that will likely cause long-term damage to their financial situation.
In contrast, regular lending includes loans from reputable companies that offer reasonable personal loan interest rates on the funds a borrower needs to accomplish a specific financial goal. For example, personal loans, auto loans, and student loans from reputable lenders fall into the category of regular lending. Although you'll have to repay all loans with interest, a regular loan shouldn't derail your financial stability.
Aggressive and deceptive sales tactics
"Predatory lenders often use high-pressure sales tactics to push borrowers into signing up for loans," says Gabriel Lalonde, CFP, CLU, CFEI, and President of MDL Financial Group.
"They may use scare tactics or offer quick cash without giving you enough time to review the loan agreement," Lalonde says. "Avoid lenders who pressure you into signing up for loans, and take the time to review the loan agreement carefully."
Identifying predatory lending practices
High or undisclosed interest rates
The first red flag of a predatory lender is high or undisclosed interest rates. Most of the best personal loan lenders charge interest rates below 36%, and many offer interest rates far less than 36%.
In contrast, predatory lenders often charge sky-high interest rates.
"Predatory lenders often charge interest rates significantly higher than the national average," says Andrew Lokenauth, Founder of Fluent in Finance.
It's not uncommon to see predatory lenders that offer interest rates as high as 400%.
Excessive fees
On top of high interest rates, many predatory lenders pile a litany of excessive fees onto your loan. For example, predatory lenders might charge prepayment penalties, which aren't a common fee for most loans.
Typically, you'll have to dig deep into the fine print to uncover these excessive fees. In some cases, these hidden fees will not be included in the loan's APR.
The only way to find these excessive fees is to read the fine print.
No credit check
Most reputable lenders require a credit check before sending you money, as the lender wants to ensure that you are likely to repay the funds in a timely manner.
In rare cases, a reputable lender will finalize your loan without a credit check. But it's very common for predatory lenders to offer you a loan, regardless of your credit score.
"This can mean that they're not concerned about your ability to repay the loan," Lokenauth says.
Short repayment terms
When taking out a loan, you need a reasonable amount of time to pay it back. If the repayment timeline is too short, the loan will likely put a significant crunch on your financial situation. This is how predatory lenders practice what's called premeditated lending, which refers to the lender taking advantage of a borrower's vulnerable financial situation in order to make a profit. With that in mind, most reputable lenders offer repayment terms of six months to several years.
In contrast, predatory lenders often offer repayment terms of a few short weeks. Typically, predatory lenders are less concerned with the stability of your financial situation. Instead, many predatory lenders will apply pressure to recoup their funds.
Unnecessary add-ons
Loan products can be complex. But many borrowers don't need the extra add-ons that a predatory lender will throw into the loan terms. Typically, these add-ons involve extra costs with minimal financial benefit.
How to avoid predatory lending
As you shop for a new loan, avoid working with lenders that charge extremely high interest rates. Avoid anything that sounds too good to be true. Always do your research about a particular company to ensure you don't get stuck with the wrong lender.
"Trust your instincts when dealing with lenders," Lalonde says. "If something sounds too good to be true or feels wrong, it probably is. Do not be afraid to walk away from lenders you do not trust or who offer loans with unfavorable terms."
Legal protections and recourse
Predatory lenders are good at their jobs. Many unsuspecting people have become the victims of predatory lenders. If you are already caught in the crosshairs of a predatory lender, act quickly to remove yourself from the situation.
Getting out of debt isn't always easy. If possible, start by consolidating your predatory loans into a new personal loan with a lower interest rate. From there, work to pay off your debt by slashing expenses and picking up extra income.
Never be afraid to ask for a helping hand from family and friends. Do anything you can to get out of the clutches of a predatory lender before things go from bad to worse. Finally, consider reporting the predatory lender to the Consumer Finance Protection Bureau.
How to find a reputable lender
Predatory lenders are frequently coming up with new ways to deceive borrowers. However, there are steps you can take to protect yourself. Here are some things to look for to find reputable lenders.
- Most trustworthy lenders will perform a credit check when you fill out a formal loan application. This is because the lender is trying to determine how you handle credit and if you will be able to take on more debt. Predatory lenders tend to target borrowers with bad credit who may have trouble getting a loan elsewhere because they know they are desperate and more willing to accept a loan with higher fees.
- Reputable lenders will have transparent loan terms. In other words, predatory lenders often try to change the loan terms when you go to sign the final loan agreement, making the loan more expensive than advertised. You can avoid falling victim to surprise fees by carefully reading the fine print before signing any documents.
- Search for customer reviews and check if the lender has been involved in any lawsuits. Lenders who respond to complaints and resolve issues in a timely manner usually have strong ratings on the Better Business Bureau website. The BBB rates businesses based on factors like their responsiveness to customer complaints, honesty in advertising, and transparency about business practices. Reputable lenders with high ratings from the BBB that also accept borrowers with bad credit include Avant, Upgrade, and Upstart.
- Predatory lenders may try to rush you through the loan process. A reputable lender will not pressure you to borrow money and will give you plenty of time to make your decision.
- You should strongly question any lender that encourages you to falsify information on your loan application. Trustworthy lenders should never ask you to inflate your income or omit information. Lying on your loan application is a serious offense punishable by jail time.
- Shop around. While it may be challenging to get a loan when you have bad credit, it's worth taking the time to shop around and compare offers. This can also give you a better idea of what's available and help identify deals that sound too good to be true.
Although finding a reputable lender can be time-consuming, it's often worth the hassle to avoid getting stuck with a predatory lender and potentially ending up in a cycle of debt. Be sure to shop around, ask questions, read the fine print, and make sure you're only borrowing what you need and what you can afford.
Check rates
FAQs about predatory lending
What loans are most commonly associated with predatory lending?
Predatory lending is often associated with payday loans, subprime mortgages, car title loans, and certain types of personal loans, particularly those targeting vulnerable borrowers.
How does predatory lending affect my credit score?
Predatory loans can negatively affect your credit score because they often carry high fees and interest rates. This can lead to missed payments or default, which can negatively impact your credit score.
Are predatory loans illegal?
While predatory lending is unethical and exploitative, it's not always technically illegal. However, fraud or deception can be subject to legal action.
Can I report predatory lending practices?
You can report predatory lending practices to consumer protection agencies, such as the Consumer Financial Protection Bureau (CFPB) or state consumer protection offices.
What should I do if I'm trapped in a predatory loan?
If you're trapped in a predatory loan, reach out for advice from a financial counselor or attorney. They can assess your situation and recommend potential strategies, such as refinancing or legal recourse.
