The first question to ask, for those who are unclear, is what do we mean by predatory lending?
Predatory Lending is referring to unfair lending practices. These types of lenders take advantage of their customers by using dishonest or unethical methods. The loan can be under unjust terms or it could be a loan that you don’t actually need.
Payday lenders can be predatory because of their triple-digit interest rates (typical APR for payday loans is 399%), and targeted 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 to better understand how to avoid a predatory lender.
Predatory lending is an unethical and often illegal type of loan which takes advantage of the client.
The lender may reel you in with rates that are a little too good to be true.
This can end up catching you into a cycle of debt with super-high interest rates and fees.
Predatory lenders have a reputation of working around legislation to target the vulnerable with unfair loan agreements.
How to Identify a Predatory Lender
If the offer seems too good to be true.
Be wary if a potential lender offers fast approval for a loan amount that’s much higher than offers elsewhere, or generally promises generous terms with few questions asked.
If the lender seems uninterested in whether you can ever actually pay off the loan, that means they probably don’t want you to ever pay off the loan — they want to keep charging you interest for as long as possible.
Triple-digit interest rates.
A sure sign of a predatory lender is that they’ll offer triple-digit interest rates on short-term loans.
The lender has no reviews online.
Unless it’s a big bank or credit union that you already trust, do some research on your potential lender. A simple Google search will reveal any complaints from other consumers, as will checking the Consumer Financial Protection Bureau’s database.
Ben Sweiry, co-founder of US loans connection service, Dime Alley, commented, “whilst we exclusively work with lenders who will provide a fair and safe service for our customers, predatory lenders are all too common across the UK and US.”
“Our top tip on how to avoid predatory lending is really to go with your gut. If a loan seems too good to be true, or if you’re feeling pressured by your lender to sign with them, take a step back and think about whether you’re being taken advantage of,” Sweiry added.
Predatory Lending and the Covid-19 Pandemic
Predatory lending circumstances have worsened since the coronavirus. Some lenders have been exploiting the financial hardships of the virus through predatory lending.
Payday lenders have also been targeting the vulnerable by advertising themselves in areas struck particularly hard by Covid-19. Lenders use these advertisements across the internet to exploit recent difficulties. Although both Google and Facebook have banned these sorts of promotions, this type of targeted advertising does still appear on these sites.
So, whilst there are approximately 23,000 legitimate payday lenders in the U.S., almost twice the number of McDonald’s restaurants, predatory lending is a practice that can seriously harm you financially, so it is important to be able to take a step-back and think about whether your lender has your best intentions in mind.