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Payday Loans

What Is Predatory Lending?

By December 7, 2021April 28th, 2022No Comments
What Is Predatory Lending?

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 suitable lender.

Predatory lending is when a lender uses deceptive or unfair tactics to get a borrower to take out a loan with only favorable terms 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. Since the lender does not provide any warning signs, anyone could fall prey to predatory lending. In this article, we are going to cover the following:

  • What are the features of predatory loans? 
  • How to find reputable mortgage loan lenders
  • What happens if a borrower defaults on predatory loans?

What can qualify as predatory lending?

 Some common warning signs can help you identify predatory loans 

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, like;

 To repair your damaged credit

To pay off your debts faster than you owe, or even 

To 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 of giving up assets. Consumers should approach the loan transaction with open eyes and understand what to do if things go wrong.

When the annual percentage rate is not disclosed 

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

You can quickly 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. Avoid the company if you are not provided with basic product information or if the lender cannot 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 ways predator lenders cover this risk.

Advocates for consumers consider such high rates and upfront fees predatory. The charges create high costs and make it difficult for the borrower or their lender to repay the loan 

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 more significant 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 lender’s name. 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 repay their loan by the due date. You can roll over 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 loan, make sure to calculate the APR. Some payday lenders often mention fees, making it difficult for borrowers to understand. 

Five red flags to show that a lender is predatory

For most people, getting money is an incredibly difficult task. As a result of this trend, private lending has become more common over several years. Here are five red flags that indicate you’re about to encounter a predatory lender.

1) Lenders who don’t explain the loan process in details

When applying for short term loans, some borrowers want as much information as possible before signing the loan contract. The former might want to know the exact terms of any agreement, while the latter prefers not to know anything unless they need it outright. However, both types of lenders should offer details, including their interest rates and repayment terms. A shady lender will likely refuse this request or provide vague answers if they reply at all. If you can’t get clear answers from your lender, it is better to get an alternative loan.

2) Lenders who offer abusive loan terms

Most lenders require borrowers to put some money down to show good faith before offering consumer loans. Still, there are cases in which certain banks or credit unions will make exceptions for people with bad credit or little savings. This is especially true if they can charge the borrower more interest and other fees over time. 

3) Lenders who are unreachable

Indeed, many borrowers don’t have much time to make phone calls or go through the entire application process. Still, if your prospective lender is difficult to track down or doesn’t reply quickly, there’s a chance they’re predatory. Borrowers should look for lenders who are reachable at all times and willing to do what it takes to help their clients get the money they need.

4) Lenders who ask for personal details upfront

When taking out any loan, borrowers need to prove that they can repay their debts. Lenders might also ask about an applicant’s credit history if they think this could play a role in whether or not they get approved. However, private lenders should never try to access personal accounts or reveal sensitive data without their clients’ permission. Borrowers should look for lenders willing to work with them while maintaining their safety and security.

5) Lenders who use deceptive practices

Finally, lenders might try many difficult or dirty tricks to get people to take out their loans. For example, they might tell applicants that someone else has already indicated an interest in the original loan even if this wasn’t true at all. Loans are serious business since many people need them to meet or expand their business. As such, potential borrowers should avoid shady lenders at all costs and find ones that can meet their needs.

How to find a reputable lender

A good payday lender will assess your credit, check your loan documents and confirm your ability to repay the loan. They will lend you the most appropriate amount 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 taking 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. You don’t need to have good credit to apply, but you will require membership in the credit union.

Get an advance

: With mobile apps such as Earning 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.

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. 

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

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