How to spot a predatory lender
Most people are familiar with the concept of predatory lending, a lending practice that imposes unfair or deceptive terms on borrowers, often taking the form of payday loans or title loans with exorbitant interest rates. But what’s the difference between a predatory loan and a legitimate loan with a high interest rate? Here’s how you can spot the difference.
Offer seems too good to be true
Beware if a potential lender shows no interest in checking your credit score, offers quick approval for a loan amount that is much larger than offered elsewhere, or generally promises generous conditions with few questions asked. If the lender does not seem interested in knowing if you will ever be able to repay the loan, it means that they are not want to you pay off the loan someday – they want to keep charging you (probably above average) interest for as long as possible.
Three-digit interest rate
A sure sign of a predatory lender is that they will offer triple-digit interest rates on short-term loans, even if the people with the worst credit scores have alternative options this will guarantee them money at an APR close to 30% (which is still quite high). Predatory lenders are also reluctant to tell you the full cost of the loan with interest, usually hiding it somewhere in the fine print or hiding it until you’ve signed the documents.
Inflated fees and penalties
Legit loans offer a clear path toward repayment, with no surprises. On the other hand, predatory lenders want to keep you on the hook forever, and one way they do so is with excessive late fees that are a percentage of the total loan, rather than a flat fee. And even if you’re a responsible borrower and pay the loan off early, you might be on the hook for prepayment penalties, which can also be calculated as a percentage of your loan. Excessive unwanted charges are also common.
The lender does not report your payments to the credit bureaus
Appropriate lenders rely on credit scores to determine whether to give you a loan, which is why they report your payments (or non-payments) to the three major credit bureaus that calculate your credit score: Experian , Equifax and TransUnion. Naturally, if bad faith lenders are more interested in keeping you in debt and staying under the radar, they’re less likely to. Make sure that any potential lender will report your payments before signing up for a loan.
You’ve never heard of the lender before
Unless it’s a big bank or a credit union that you already trust, research your potential lender. A simple Google search will reveal any complaints from other consumers, as will checking for Consumer Financial Protection Bureau Complaints Database.
The lender wants direct access to your bank account
Although many lenders require access to your bank account in order to process automatic payments, providing this information should not be a requirement. By Karma credit, a predatory lender may treat your account like an ATM, making repeated payment requests even if you accumulate bank overdraft fees if your account runs out of funds. Also note that you should be able to cancel automatic payments at any time.
If you are struggling with debt, consider your options before restructuring your mortgage or taking out an adverse personal or payday loan.