What are Predatory Loans?
Predatory loans involve unfair and deceptive tactics that mislead borrowers about the true nature of a loan obligation. These loans can take the form of payday loans, car loans, tax refund anticipation loans, or any other type of consumer debt. A predatory loan has high-interest rates, high fees, and is designed to strip the borrower of equity. Lenders typically target low income or less-educated populations and prey on those who are otherwise unable to obtain mortgage loans, auto loans, and other types of loans due to their financial situations.
Any type of loan can be a predatory loan if the company uses unfair and deceptive practices to sell it. Here is some important information to look out for that could signal whether a lender is predatory to protect yourself against their traps.
Who Gets Predatory Loans?
Predatory loans target minorities, the low-income, the elderly, and the less educated. These loans benefit from the borrower’s lack of ability to repay the debt and lack of understanding about loans and terms.
Additionally, predatory loans prey on individuals who have recently lost their jobs, have credit problems, and need immediate cash for emergencies. For example, if you are in too much debt and you need to pay your medical bills or if you are trying to obtain a mortgage loan, but your income isn’t high enough, predatory loan lenders will contact you with good looking options that in reality have undesirable terms.
Types of Predatory Loans
A predatory loan has very high-interest rates, extra costs, high fees, and penalties. They can take many types of forms. Here are some examples:
Balloon payment loans - Balloon payment loans start with lower, easier-to-pay terms, then "balloon" into much bigger payments later on. They are typically offered for mortgages and you should be careful of this type of mortgage loan as it will grow into an amount you will not be able to repay. If you can't make the larger payments, you can default on the loan, and have to take out another loan with high interest and fees to meet the original loan payments.
Payday loans - Payday loans are costly short term loans that are due on your following payday. However, payday loans are extremely risky with an APR close to three digits and skyrocketing interest rates, making it impossible to pay back. Additionally, some payday lenders have been known to charge as much as 900% on a payday loan.
Title loans - Title loans work by giving your car title to a lender in return for cash. These types of loans must be repaid quickly because they have significantly high APR’s and interests. Also, If you don’t repay the loan according to the terms, the lender can repossess your car.
“Negative” amortization loans - Negative amortization loans are loans with monthly payments less than the interest cost. The lender then adds the remaining interest cost to your loan balance, growing the balance. Soon, the borrower finds himself paying back way more than he borrowed on the loan.
Packing Loans - Packing loans are a type of loan in which lenders "pack" the loans with loads of fees, charges, and penalties that could cause extra burden on the borrower. With the hope that the borrower won’t notice these extra fees, the lenders try to hide them in the fine print.
How to Protect Yourself Against Predatory Lenders?
If you look carefully at the contract and gain enough information, you can easily spot when a predatory loan is being offered. If a loan seems too good to be true, has high-interest rates, high fees, and strict penalties for missing a payment, then there is a large possibility that it is a predatory loan. Also, if no one will directly answer your questions and if it’s hard to tell what the loan costs are, you must know that these are some red flags.
If you have suspicions you can further detect red flags by asking questions, such as:
Are the interest rate and term capped, or will it change during the course of the loan?
Are there any changes to the loan that you can make that I need to know about, like repayment fees?
What are all the fees I may incur, including ones that may fall outside the loan such as account fees?
In order to protect yourself from these types of loans, you must first ask all of these questions about high-interest rates and fees. Read the fine print of the loan contract and refuse to accept payments you know you cannot afford.
Additionally, you must keep an eye out for phone calls and text messages. If the lender makes a lot of phone calls to you and sends you text messages about the loan, which are high-pressure sales methods, you should realize that there is something wrong.
The Risks of Predatory Loans
Predatory loans can be really risky and make your financial life worse than it was before. You might feel like you don’t qualify for any other loans, have low income or bad credit, but in reality, getting a predatory loan will cause you more trouble. For example, if you are subject to a balloon payment or negative amortization there is a risk that can cause you to lose your home. Besides, those are not the only types that can cause damage. While getting a title loan can cause you to lose your car, a payday loan can ruin your credit score for an extended period of time. That’s why it is important to keep an eye out for red flags that can signal predatory loans.
Predatory loans have unrealistic paydown terms, sky-high interest rates, and mounting fees and penalty-based charges, setting up borrowers for failure. Borrowers who are targeted by predatory lenders often feel like they have no choice but to sign on to a loan, as they had trouble getting other types of loans due to their financial condition. Predatory lenders know this and get even more aggressive about their deceptive and unfair marketing practices to sell those loans. That’s why you must be aware to stay away from predatory loan contracts, as they are designed to benefit the lender and threaten your financial health.