How to Spot Predatory Lending Practices

Predatory lending practices usually involve unfair, deceptive, and sometimes abusive loan terms on the borrowers. One characteristic of predatory lending practice is that these loans will have high fees and interest rates, strip the borrower of their equity and in many cases, place a creditworthy borrower in a lower credit-rated loan– which is usually very expensive. 

To sell these harmful loans, the lender applies very forceful, tactical, and aggressive sales strategies to take advantage of the borrowers- who in many times are innocent and lacking the understanding of financial transactions. Predatory lenders use deception and fraudulent actions to lure in borrowers, they are not transparent, they’ll entice, induce and assist the borrower to take the loan that they will not reasonably be able to pay back. Here are some useful tips to know if you are dealing with a predatory lender. 

The Terms and the Loan Offer Is Too Good To Be True

One of the first things that will tell you that you are dealing with a predatory lender is that they do not really care about your credit score. In addition, they will offer you fast approval for the loan amount which is usually much higher than what other lenders are willing to give you. These are the red flags that should warn you that you are dealing with a predatory lender. Be very skeptical when the lender makes a good offer that seems too good. In most cases, they want to rope you in, tying you to a loan that you will not be able to pay so they can benefit from charging you high interest for as long as possible. 

Some of the promises we’ve seen include companies promising to help you improve your damaged credit, help you clear the debts for much less than you actually owe, or give you extremely cheap loans despite low credit scores and patches in your credit history. 

The Lender Will Never Disclose The APR Attached to the Loan

This is another red flag to watch out for, and it is one of the predatory lending practices that you should always be on the lookout for. These companies will make it hard for you to know the real cost of the loan. If the lender is genuine, they will be transparent about the real cost of the loan. 

With every lender, it should be easy to navigate their website and find all the costs that are associated with the loan, or if you visit their branch in person, this information should be easily available. You should be able to easily find the origination fee, any late fees, penalties associated with the loan, and any other charge. 

It is a legal requirement that lenders must state the loan’s annual percentage rate. An annual percentage rate that is below 36% is considered affordable by consumer advocates. 

If this information is missing and sometimes hidden in the fine print and the lender is uninterested to answer your question about the cost of the loan, run fast!

Inflated Fees and Penalties

If a loan is truly legitimate, there should be no surprises. Everything is clear including repayment and ‘conflict resolution’ should you fail to pay back the loan. This is not the case with predatory lending. 

Inflated fees and penalties are other predatory lending practices that you should always look for. In most cases, these lenders will offer triple-digit interest rates on short-term loans. And just like their annual percentage rate, predatory lenders will never be forthcoming about telling you the fees and penalties. They will disclose this information when it is too late. In addition to that, even if you are a responsible borrower and pay off the loan early, these lenders will not let you go easy, you will still be on the hook for prepayment penalties, which in some cases will be calculated as a percentage of the loan. 

It’s Extremely Easy To Get Approved But You Cannot Build Credit With The Loan

As previously mentioned, these lenders will never be interested in doing a background check into your credit history before offering you a loan. They are uninterested in knowing how you have handled debt in the past, or the potential impact of adding more debt to your portfolio. To make up for that risk, they will charge you higher rates which go over 100% APR while also structuring the loan with higher upfront fees. 

These predatory lending practices are considered ‘predatory’ by the consumer advocate groups because they add high costs making it hard for the borrower to pay back the loan within a given time. 

Good and legitimate loans will help you build your credit in that the lender reports on-time loan payments to the credit bureaus. This in time will help build your credit but this doesn’t happen with predatory lenders. They will rarely report your progress. 

Asset Based Lending

As a predatory lending practice, these lenders will not give you a loan based on your ability to pay the loan, rather based on your asset (car, house, and any other valuable asset). If you fall behind on your payments, you risk losing the property.