Jessie Eby contributed to this blog. Para la versión en español, oprima aquí.
Predatory lending is a serious issue that can devastate borrowers, particularly in vulnerable communities. Understanding what it is, why it’s harmful, and how to avoid it can help you protect yourself and others from its damaging effects. Here's what you need to know about predatory lending practices, their impact, and what you can do if you find yourself ensnared by one of these deceptive loans.
What is predatory lending?
The term predatory lending refers to exploitative practices by lenders that benefit them while causing significant harm to borrowers. These practices include offering loans with high interest rates, excessive fees, and unrealistic terms and conditions. Predatory lenders often target individuals who need cash quickly, enticing them with fast loan approvals but hiding the true cost and risks in the fine print.
The terms of these loans are often unclear or buried in legal jargon, making it difficult for borrowers to understand what they are agreeing to. In their desperation, many people overlook the loan terms, only to find themselves trapped in a cycle of debt.
Why is predatory lending harmful?
Predatory lending targets vulnerable individuals, including those with low incomes, poor credit histories, minorities, and the elderly. These people tend to have limited access to traditional financial services and often feel like they have no other options. Predatory lenders take advantage of their desperation, locking borrowers into loans with terms and conditions that make it nearly impossible to escape without assistance.
Identifying predatory loans
The best way to avoid falling into a predatory lending trap is to learn to read the fine print and fully understand the terms before signing. Look at the monthly payment and determine the cost of the loan, then ask yourself: Would a loan with a bank or other lender offer a lower cost? Multiplying the monthly payment by the total number of payments and comparing it to the original amount of the loan gives you a good idea of the cost of the loan.
In addition to reading the fine print, here are a few red flags that can help you quickly identify a predatory lending situation.
- No credit check required. A guarantee of approval despite poor credit history is a telltale sign of a sketchy situation. Legitimate lenders are concerned with your ability to repay the loan and will almost always take a look at your credit history.
- High interest rates. Interest rates beyond a typical credit card or bank loan point toward predatory lending schemes.
- Unfair terms and conditions. Watch out for penalties for early repayment, weekly payments tied to your paycheck, or terms that prioritize the value of collateral over your ability to repay.
- Repayment terms that don’t cover the interest due. This ensures you can never repay the principal amount of the loan, and remain trapped.
- Pressure to sign quickly. All too often, borrowers are rushed into an agreement so they don’t have time to review the terms.
Common predatory lenders include:
- Pawn shops
- Buy-here-pay-here shops
- Rent-to-own stores
Getting out of a predatory loan
If you find yourself trapped in a predatory loan, here are several steps you can take to improve your situation.
- Reach out to the Center For Rural Affairs lending services for help navigating the terms and conditions of your loan offer.
- Explore refinancing options with reputable lenders. This can help you get better terms and lower interest rates, allowing you to climb out of debt more quickly.
- Consult a certified credit counselor for help managing your debt and building a repayment plan that fits into your budget.
- Seek legal assistance. A lawyer or legal aid organization might be able to assist you and provide guidance on your rights and potential legal action against the lender.
Fighting against predatory lending
Some states are taking action to protect their residents from predatory lending practices. Nebraska has introduced several measures to combat these unfair practices.
- Interest rate caps: Nebraska's Initiative 428, passed in 2020, capped the annual percentage rate on payday loans at 36%.
- Banning predatory repayment practices including prohibiting balloon payments, excessive fees, and other exploitative terms.
- Clear disclosures: Requiring lenders to clearly disclose loan terms and conditions.
Predatory lending is a prevalent issue that targets the most vulnerable members of our communities. You can protect yourself by recognizing the signs of predatory lending and helping your loved ones to do the same. Strides are being made to fight these exploitative lending practices, but continued awareness and advocacy are crucial to creating a safer financial environment for all.
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