How to Spot Predatory Lending Practices
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When consumers are most vulnerable and don’t have the money to make ends meet, payday lenders are there to offer fast cash with no credit check. But predatory lending traps consumers in a cycle of debt with fast repayment periods, triple-digit APRs and high-risk collateral.
Learn how to identify predatory lending practices, and consider the alternatives to taking out a predatory loan.
What is predatory lending?
Predatory lending financially harms the consumer through unfair, abusive or coercive practices. Common indicators of predatory lending practices generally include very high interest rates and short repayment periods, which when combined can make a loan incredibly difficult to pay back.
6 signs of a predatory lender
Be on the lookout for these examples of predatory lending:
- Triple-digit interest rates. Before you agree to anything, look over your loan agreement with a fine-toothed comb to determine the APR.
- Short repayment terms. Payday loans have two-week repayment periods, and car title loans can have 30-day repayment periods. This may not be sufficient time to repay the money borrowed.
- Lack of transparency around cost. If you can’t determine a loan’s APR by looking into the loan agreement, that’s a red flag. Lenders may try to sneak additional fees into the agreement, as well.
- High-risk collateral to secure the loan. A small loan with expensive collateral isn’t a good mix. If you can’t repay your secured car title loan, the lender may be able to repossess your vehicle to make up for lost money.
- Loan flipping to repay the loan. Loan flipping is when the borrower cannot repay a loan and needs to “roll over” their current loan into a new loan, which incurs additional fees.
- An offer that is too good to be true: If a lender advertises quick and easy loan approval for bad or no credit, for example, that could be a red flag.
Common types of predatory loans
Common forms of predatory lending include payday loans and car title loans, although some small-dollar installment loans and other types of lending may also involve predatory practices.
These small-dollar loans let consumers borrow money they need immediately before they get their next paycheck. Payday loans are popular among consumers who are struggling financially because they don’t require a credit check – just a government-issued ID, a bank account and proof of income.
Payday loans have extremely short repayment periods (typically two weeks) and interest rates can be in the triple digits, typically around 400%, according to the CFPB. Many consumers cannot pay back their payday loan on time, and they must take out another loan to repay the first one, resulting in additional fees that can create a cycle of debt in which the borrower is unable to completely pay off a loan and must take out more debt to cover costs. The most recent data from the CFPB found that about 4 out of 5 payday loans are rolled over or followed by another loan within two weeks.
Rolling over your payday loan is a surefire way to stay trapped in a cycle of debt. You might consider credit counseling or other alternatives for how to get out of a payday loan.
Car title loans
Car title loans also come with short repayment periods and high interest rates, in addition to the potential of losing collateral. If you cannot repay the loan within the time period – typically 30 days – the lender can repossess your car or offer to roll over the loan for a longer period of time, which will further increase the cost of the loan. Eventually, the loan may become impossible to pay back.
Predatory mortgage companies can charge high interest rates, as well as excessive fees. For example, they may overcharge for an origination fee, where other lenders may not charge one at all. Beware vague-sounding fees, as well, such as an administration fee.
Predatory mortgages are also commonly known for balloon payments. These occur when fees increase further down in repayment, causing your payments to increase suddenly. Balloon payments can make repayment unaffordable down the road.
How to avoid predatory lenders
- Ask questions and research fees: As you shop lenders, probe for information related to fees, how repayment works and other information you’ll need to make an educated borrowing decision. If you find a lender is dodgy, it’s best to move on to other options.
- Avoid pushy lenders: If you feel pressured to make a fast loan decision, you may be dealing with a predatory lender.
- Double-check your loan agreement before signing: Predatory lenders may sneak in additional fees or change your payments at the last moment. Always read your loan agreement to ensure it matches what you agreed to verbally.
- Read consumer reviews: Reviews from other borrowers can help you determine whether you’re working with an untrustworthy company.
Consumer protections in place to deter predatory lending
The CFPB issued a 2017 ruling on payday, car title and certain high-cost installment loans that rolled out a set of consumer protections. These protections identified unfair and abusive practices on certain loans, such as:
- Withdrawing funds from a consumer’s account after two consecutive attempts have failed.
- Withdrawing funds from a consumer’s account without giving notice.
- Issuing a loan which the borrower will not be able to repay (a ruling which has since been reversed – more on this later).
There are more laws that protect consumers from predatory lending practices, but they vary depending on where you live. For example, small-dollar lending is legal in 32 states, and most of those states have APR caps on short-term installment loans that are less than $500 or $2,000.
However, there is no federal APR cap on small-dollar loans. And rate caps vary widely across state lines, with some states having no cap whatsoever:
|States without APR caps on $500 loans with a 6-month repayment period|
|Source: National Consumer Law Center|
|States without APR caps on $2,000 loans with a 2-year repayment period|
|Source: National Consumer Law Center|
CFPB rolls back lending regulations on small-dollar, payday loans
The COVID-19 crisis has put millions of Americans out of work. At a time when many are struggling just to pay their bills, consumers may turn to small-dollar loans – including payday loans – to tide them over. In an effort to increase access to credit, the CFPB rolled back its own 2017 regulation that required lenders to make sure borrowers are able to repay a loan before lending.
With this regulation rolled back, borrowers must take extra precautions before borrowing, particularly for small-dollar loans. This includes ensuring the lender is trustworthy and charges reasonable fees, and that you can afford loan repayment.
Alternatives to predatory small-dollar lending
Turning to a payday or car title loan should be a last resort if you can’t pay your bills. Before taking out a payday loan to pay your bills or cover an unforeseen need, consider how to avoid borrowing from a predatory lender:
- Reach out to your lender or card issuer to let them know you’re experiencing hardship. They may have programs specifically designed to help consumers who are struggling due to the pandemic, such as mortgage forbearance.
- Prioritize your bills in an order that makes sense to you. For example, secured debts, like a mortgage or an auto loan, should be your top priority, as your home offers shelter and your car transports you to work.
- Make the minimum payments on your debts, if possible. If you can’t pay your credit card statement balance in full, try to make the minimum monthly payment to keep your account in good standing.
- Seek out federal, state and local assistance programs. You may qualify for help with utility payments or even qualify for Supplemental Nutrition Assistance Program (SNAP), otherwise known as food stamps. You can also visit your local food bank and get in touch with your local social services office to see what programs may be available to you.
- Secure a small personal loan or bad credit loan. Borrowers may be able to take out a small personal loan with reasonable interest rates or access bad credit loans that offer more affordable rates and a longer repayment term compared to a payday loan. Carefully research your options, such as by prequalifying for a loan, before formally applying.
- Consider filing for bankruptcy. If your financial situation is extremely dire, taking out a payday loan is only going to be a temporary fix for a more serious problem.