If Dante were writing “Inferno” today, I’d be willing to bet he’d find a spot in the Seventh Circle of Hell for predatory lenders, right next to the usurers he cast down there. These smooth-talking money snatchers prey upon people when they need a loan, like some snake lying in wait.
Their punishment was to sit forever on burning sand under a rain of fire. If you’ve got the gumption, let me play Virgil and lead you through the fiery pits of high-interest loans and shady deals to see where it takes us.
A predatory lender engages in the practice of taking advantage of vulnerable borrowers for financial gain.
To be clear, predatory lending is a practice where the lender deceives or coerces borrowers into accepting unfair or abusive loan terms. These loans usually have high interest rates, hidden fees, and penalties — all meant to trap people in unending debt.
I’ll explore the traits of predatory lenders, the kinds of loans being hawked, and how you can keep from becoming their victim.
Characteristics of Predatory Lenders
It’s important to know the signs of a predatory lender so you don’t get roped into a deal that would likely sink your boat faster than a direct torpedo hit. Knowing these traits beforehand can save you from falling into their trap before it’s too late.
High Fees and Hidden Charges
One of the biggest tricks in a predatory lender’s arsenal is loading up their loans with sky-high fees and hidden charges. You’ll be slapped with what seems like small costs at first, but they may quickly pile up so you’re actually paying way more than you bargained for.
These little gumdrops are probably buried in the fine print or tacked on at the last minute when you’re about to sign the papers. By that time, you are stuck with a loan that costs a heck of a lot more than it should have, making it almost impossible to pay back.
Unfair Loan Terms
The worst thing is that predatory lenders simply adore concealing loan terms that may look superficially OK but could really burn you down the road. A common trick is balloon payments: The payment is small each month, but there is a big old surprise at the end, a large payment most people cannot afford.
These loans may have prepayment penalties, too, so if you attempt to pay the loan off early, you get zapped with extra fees. That’s the way the predators can make certain they wring every last cent out of you, even if you are trying to do the responsible thing and get out from under the loan.
These impossible terms can get you paying and paying, yet it never seems like the loan goes away.
Aggressive Sales Tactics
Predatory lenders don’t just hang out waiting for you to come to them; they go out of their way to push loans on people who can’t afford them. They’ll use hard-sell tactics to get you to sign on the dotted line before you’ve got a chance to think it over.
Here are some examples:
- Hurry You to Sign Up: They rush you to sign by telling you about a limited-time offer or behaving like you need to decide at that very moment. They do this so you don’t have a chance to think over the terms or look for a better deal.
- Preying on Your Emotions: The predatory lenders are great at playing on fear or greed. By the time they’re through, you may be thinking that your failure to take that loan means you’re going to lose your home or miss out on something important. So, you find yourself signing under duress.
- Overpromising Benefits: Predators paint a picture so rosy that it sounds unbelievable to most folks. They tell you how their loan is the answer to all your problems. What they do not tell you about is the pitfalls lying between the lines, which hit you after you sign.
- Ignoring Your Financial Limits: Watch out when they reassure you that you can easily afford the loan. It may turn out just the opposite, leaving you locked into a miserable deal.
Aggressive lenders don’t want to help you out; they simply want your money. If you feel hurried or pushed into taking out a loan, see it as a warning sign that you may be dealing with a predatory lender.
Common Types of Predatory Loans
Predatory lenders often push certain types of loans that sound good on paper but don’t benefit their victims. Let’s look at some of the most common kinds of loans they use to take advantage of borrowers.
Payday Loans
Payday loans are short-term, high-interest loans that a lender will offer to you as a quick fix when you’re strapped for cash. They make it sound so easy: You borrow a little, and then pay it back with your next paycheck. But when the APR can hit 400%, 700%, or more, it won’t be long before the “quick fix” has you buried deeper in debt than where you started.
Here’s how they work: You write a postdated check or authorize an automatic withdrawal for the amount borrowed plus the fees. Payday lenders aim for people who are short on cash, lack legal residency status, or have bad credit, knowing full well they have few alternatives.
While some states have imposed major restrictions on the loan amounts or banned payday loans altogether, there are places where it’s like the Wild West, with payday lenders running amok and setting up shop in vulnerable neighborhoods, ready to rope in anyone desperate enough to take the bait.
If you can’t pay off the loan when it’s due, they’ll roll it over. A “rollover” is when you borrow again to cover the old loan. Only now, there are even more fees and interest added on. It doesn’t take long for those rollovers to pile up until you’re so deep in debt you can’t see the way out.
Car Title Loans
Car title loans are secured by the title to your vehicle, but if that does not sound risky, wait until you hear how these loans work. They are short-term loans with extremely high interest rates — 300% APR or more. If you can’t pay the loan back on time, they’ve got the right to take your car.
Here’s the grift: You give them the title to your vehicle and they give you a loan against the value of the car.
You get to keep driving it but miss one payment, and they’ll repossess your ride faster than a pickpocket snatching a wallet.
Once they have repossessed the car, they usually sell it off to cover the loan amount. The worst part? Even if they manage to sell it for more than what you owe, you might not see a dime of the extra money because they may keep that, too, and chalk it up as fees. It’s a heads-they-win, tails-you-lose deal where you might end up without a car.
These loans exploit desperate people in need of quick cash, and who are willing to jeopardize what may be their only dependable transportation. It’s a trap that can leave you taking the bus to work while someone else rides off with your wheels.
High-Interest Personal Loans
These loans may seem like a good quick fix when you’re strapped for cash, but the interest rates can be predatory, especially in states that allow APRs to soar well above 36%.
In states with less stringent caps on loan rates, such as Texas or Nevada, lenders can charge sky-high interest rates, sometimes pushing those rates as high as 100% or more.
That kind of interest can turn what would seem to be manageable into a crushing debt nearly impossible to pay off.
Fall behind on these loans, and you’re in for a whole lot of hurt. Lenders in lax-regulation states tend to be extremely aggressive in their payment collections.
If you miss a couple of payments, you can expect to be pestered ceaselessly with harassing calls along with threats of legal action. It’s loan sharking, fitted out in legalistic paperwork.
Predatory Lender Warning Signs
The red flags of a predatory lender are there well before you get hoodwinked into some lousy deal. People in this business are smooth, and unless you’re looking out for warning signs, you may find yourself in hot water faster than a clam at a seafood boil.
Lack of Transparency
A prominent sign of predatory lending is that the villain won’t show you everything upfront. They gloss over the details, omitting the important things like hidden fees or costs until after you sign on the dotted line.
Eventually, you realize what you are really paying, but it’s too late to change your mind. You’re stuck with a terrible loan that costs loads more than you bargained for.
Encouragement to Falsify Information
Another slimy tactic is to try to get you to fudge the truth on your loan application. They’ll tell you to pad your income or downplay your debt just to get the loan approved.
The lender is up to no good if it asks you to falsify your income. It is illegal to lie on any loan application and could result in legal consequences.
All this may seem harmless at first, but once it comes out, you’ll be the one left holding the bag. The deception could cost you a whole lot more than you expected. In some cases, you may be guilty of fraud and end up behind bars.
Targeting Vulnerable Populations
The predatory lenders know whom to target, and it is often the elderly or those people who barely have enough to make ends meet. They will target low-income individuals, those with poor credit or limited financial understanding, positioning the deal as if it were a lifeline when, in fact, it is an anchor.
Older people are prime targets for predatory lenders because many of them are living on fixed incomes, making it tough to keep up with rising expenses. Plus, some of them may not understand the fine print through no fault of their own. These lenders prey on those who are desperate for assistance, the most vulnerable among us.
3 Ways to Protect Yourself from Predatory Lending
These predatory lenders will get you faster than an alligator on your front lawn if you aren’t careful.
- Research and Compare Lenders: Before signing anything regarding a loan, research several different lenders. You don’t buy the first hog at the auction without looking at the rest, and you shouldn’t do that with loans, either. Don’t fall for the first pitch that comes your way. Compare the rates, the fees, and the terms of your loan so you can get the best deal.
- Carefully Review Loan Terms and Conditions: Don’t let them rush you into signing. Take your time and go over every word in that loan agreement. Make sure you know what you’re getting into, from interest rates to charges of all kinds. By reading all the terms upfront, you’re less likely to end up with a raw deal later on. Get on that fine print like you’re tracking a deer.
- Seek Financial Advice: If any of these aspects put you in a quandary, then please do not hesitate to consult a lawyer, financial advisor, or credit counselor who can help you figure out whether the loan will turn out to be a good deal or a trap with your name on it. Sometimes, all you need is a second pair of eyes to save you from getting tangled up in a bad situation with predatory loans.
Knowing these tips and strategies will help you steer clear of their tricks and keep your hard-earned money where it needs to be — in your pocket.
Predatory Lenders Can Trap You in a Long Debt Cycle
Predatory lenders are slicker than a greased pig at a county fair, and once they’ve got you in their grip, it’s mighty tough to wrangle your way free.
Promising quick cash, they lure you into a debt cycle with a kick harder than a stubborn mule’s. The best way to beat them is to steer clear in the first place, keeping your eyes peeled and your wallet safe from their clutches.