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What Is Predatory Lending?

A payday loan lender may offer predatory lending to the borrower. Find out the warning signs and how you can spot a good lender.

Predatory lending is when a lender uses deceptive or unfair tactics to get a borrower to take out a loan with terms that are only favorable for the lender and not the borrower.

Predatory lenders might target borrowers with poor credit and low income. These are people with a low credit score of 630 and below. Anyone could fall prey to predatory lending since the lender does not provide any warning signs.

What can qualify as predatory lending

Although consumer advocates may not always agree on the definition of predatory lending, some common warning signs can help you identify bad lenders.

When the deal appears too good to be true

Financial advisors warn that you be skeptical if a company offers you something too good. Advertisements may appear promising to repair your damaged credit, pay off your debts faster than you owe, or even give you a loan for a fraction of the cost.

Before you sign any agreement, make sure to look for the catch. High fees may result in being trapped in a cycle or having to give up assets. Consumers should approach the loan transaction with open eyes and an understanding of what to do if things go wrong.

When the annual percentage rate is not disclosed 

A company that makes it difficult to determine the cost of the loan is a sign of predatory lending. Financial advisors counsel that a consumer-oriented lender will disclose the total loan cost upfront.

You can easily locate all costs associated with a financial product by visiting a branch or browsing the company’s website.

Lenders must state the annual percentage rate of the loan. This is the total of the upfront fees and the interest rate. Consumer advocates consider rates below 36% APR to be affordable. Avoid the company if you are not provided with basic product information or if the lender is unable to answer your questions.

When it is surprisingly simple to get approval

Lenders that do not require a credit check to offer loans don’t assess your past debt management or the impact of borrowing more. High rates and high upfront fees are some of the ways predator lenders cover this risk.

Advocates for consumers consider such high rates and upfront fees predatory because they create significant costs and make it difficult for the borrower or their lender to repay the loan on the agreed term.

Here are a few signs to watch out for:

  • When the lender does not ask for information regarding your income and debts.
  • When the lender pushes you to accept a larger loan amount than you requested.
  • Instead of monthly fixed payments, the lender wants a balloon or lump-sum payment
  • When the lender encourages repeat borrowing and the extension of the loan.

When a loan won’t help you build credit

Good lenders should report on-time payments to Equifax, Experian, and Transunion. 

This will allow you to improve your credit score, increase your credit history, and be eligible for lower financial products in the future. Your score will be temporarily affected if you miss payments.

When auto-withdrawal is your only option for payment

No lender needs to access your bank account to collect payments.

Many lenders will request access to your account to promote automatic payments. However, a predatory lender may make repeated payments to your account, while you accrue bank overdraft fees.

When there are a lot of complaints about the lender 

Do your research on the online reputation of the lender, much like you would use Yelp to find reviews.

You can check the Better Business Bureau rating and customer reviews to see how many complaints have been filed against the company. 

Check the Federal Trade Commission’s scam alerts for the name of the lender. Finally, make sure to check the Consumer Financial Protection Bureau’s complaints database.

How predatory lending looks like

Because payday loans have short repayment terms and high fees, they are one of the most common examples of predatory lending.
Here is an example:
You are looking for a $400 loan for a medical emergency. The loan has a repayment term of 14 days. The loan fees are $15 you borrow. In total, you will have to pay 60 for the loan of 400. 
Most borrowers will not be able to repay their loan by the due date. You can rollover or extend the loan to avoid paying another $60 fee. 

Why you should watch out for predatory lenders

According to research by The Pew Charitable Trusts on payday loans, borrowers pay $520 per loan to get $375 from a lender.
Before you take out any type of loan, make sure to calculate the APR. Although lenders should be able to provide the APR, payday lenders often mention fees which can make it difficult for borrowers to understand. 

How to find a good lender

A good lender will assess your credit and ability to repay the loan. They will lend you the amount that is most appropriate for your needs and disclose the total cost of the loan. This lender does not encourage repeat borrowing.

Are there alternatives?

You can consider other options before you take out a loan from a predatory lender.

A loan from credit unions

Federal credit unions offer payday alternative loans. These loans have lower interest rates, longer repayment terms and are more affordable than payday loans. To apply, you don’t need to have good credit but you will need membership in the credit union.

Get an advance

: With mobile apps such as Earnin and Dave, users can access a portion up to two days before their paycheck with no interest or fees. There are limits on the amount you can borrow.

Loans from community organizations

 Funds can be provided by local nonprofits, religious groups, and community organizations for essential expenses such as rent, utility bills, and groceries. 

Borrow from your family and friends

If you are in financial trouble, someone close to you might be able to help you find the money. To avoid miscommunication, make sure you use a loan agreement.

Get a personal loan

A personal loan can be obtained from a bank, credit union, or other reputable online lenders. They offer lower APRs and more flexible repayment terms than payday lenders. 

Particularly, credit unions can offer personal loans with flexible terms for applicants with bad credit.

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