The first question to ask, for those who are unclear, is what do we mean by predatory lending?
Predatory Lending refers to unfair lending practices. These types of lenders take advantage of their customers by using dishonest or unethical methods. The loan may have unfair terms or it may be a loan you don’t really need.
Payday lenders can be predatory due to their triple-digit interest rates (the typical APR for payday loans is 399%) and their focus on poor consumers with low rates of financial literacy.
So, if you’re considering a short-term personal loan, this article should help you better understand how to avoid a predatory lender.
Predatory lending is an unethical and often illegal type of lending that takes advantage of the client.
The lender may bamboozle you with rates that are a little too good to be true.
This can end up leading you into a cycle of debt with very high interest rates and fees.
Predatory lenders have a reputation for circumventing legislation to target vulnerable people with unfair loan agreements.
How to identify a predatory lender
If the offer seems too good to be true.
Beware if a potential lender offers quick approval for a much higher loan amount than offers elsewhere, or generally promises generous terms with few questions asked.
If the lender doesn’t seem interested in whether you can actually repay the loan, that means they probably don’t want you to repay the loan – they want to keep charging you interest for as long as possible.
Three-digit interest rate.
A sure sign of a predatory lender is offering triple-digit interest rates on short-term loans.
The lender has no online reviews.
Unless it’s a major bank or credit union you already trust, research your potential lender. A simple Google search will reveal any complaints from other consumers, as will checking the Consumer Financial Protection Bureau database.
Ben Sweiry, co-founder of US loan connection service Dime Alley, said: “While we work exclusively with lenders who will provide fair and safe service to our customers, predatory lenders are only too common in the UK and the US”.
“Our best advice for avoiding predatory lending is really to go with your instincts. If a loan seems too good to be true, or if you feel pressured by your lender to sign with it, take a step back and ask yourself if you are exploited,” Sweiry added.
Predatory lending and the Covid-19 pandemic
The circumstances of predatory lending have worsened since the coronavirus. Some lenders have exploited the financial difficulties of the virus through predatory lending.
Payday lenders have also targeted vulnerable people by advertising in areas particularly affected by Covid-19. Lenders use these advertisements on the Internet to exploit recent difficulties. Although Google and Facebook have banned these types of promotions, this type of targeted advertising still appears on these sites.
So while there are approximately 23,000 legitimate payday lenders in the United States, nearly double the number of McDonald’s restaurants, predatory lending is a practice that can seriously harm you financially, so it’s important to be able to take step back and think about whether your lender has your best intentions in mind.