One of our biggest worries are debt collectors and sometimes we become victims of predatory lenders. From time to time, you might find yourself needing to borrow cash for a big purchase, such as buying a house or paying for college . While these types of loans can turn your financial situation around, some loans are considered predatory loans and can actually hurt your financial situation even more. Predatory loans are structured to be “debt treadmills” that put you in a stickier financial situation.
In this article, I’m going to outline how you can protect yourself against predatory lenders and debt collectors so you’re more financially aware for the future.
Often, predatory lenders will target people who are cash-strapped and entice them with promises that are too good to be true. These loans carry extremely high interest rates, fees, and penalties, which end up benefiting the lender instead of the borrower.
Predatory lenders will target financially vulnerable people such as the poor, the less educated, and the elderly, and convince them to sign up for loans with unfair and abusive terms.
These lenders will only focus on getting their Return Of Investment and flatly ignore the borrower’s ability (or inability) to repay the debt. The borrower, therefore, ends up trapped in a cycle of debt that damages their financial well-being.
Predatory lending companies usually target the most vulnerable Americans through aggressive door-to-door, TV, phone, and email marketing strategies. Their sales tactics are often designed to touch the pain points for some of these financially vulnerable groups:
- Elderly, unemployed, or less-educated Americans
- Young people between 25 and 49 that still rent their homes
- Low-income employees making under $25,000 a year
- Military personnel
- Cash strapped people who are struggling with financial emergencies such as medical bills, emergency home repair, or car repair payments.
- People with low credit scores that limits them from accessing loans from credible financial institutions such as credit unions and banks
If you fit in any of the above criteria, you just might be the next target of a predatory lender. While many people confuse predatory loans as only short-term financial offerings, they can be just about any loan that uses unfair and deceptive practices.
Predatory loans can be in the form of payday loans, auto title loans, mortgages, or home equity loans that:
- Have unreasonably high-interest rates ranging from 35% up to 400%
- Have adjustable interest rates that explode over time
- Have limited documentation and rushed sign-up period
- Encourage a borrower to refinance a loan repeatedly through “flipping,” and adding even higher fees after every refinance
- Imposes a prepayment penalty for paying off early
- Have unfair loan terms that don’t favor the borrower
- Leave a borrower in a worse financial position
But how can you really identify a predatory lender? Well, let’s look at some of the tell-tale signs that you can look out for.
If you’re wondering how to protect yourself from predatory lenders and debt collectors, the best thing to do is educate yourself about their deceptive strategies and practices. Predatory loans come with common red flags that should grab your attention immediately. Here are a few red flags that might indicate you’re dealing with a predatory lending company:
Sky-High Interest Rates, Fees, and Penalties
This is perhaps one of the most obvious red flags for a predatory loan. It’s crucial that you understand the interest rates, associated fees, and any penalty charges associated with the loan you’re signing up for.
It’s always wise to compare the interest rates for the same amount of loan from other institutions, such as banks, to ensure that you’re getting the best deal. Avoid signing up for any loan with charges, fees, and penalties that you don’t understand or can’t afford.
If the lender makes it hard to see how much you’ll pay for the loan, this should be a big warning sign that you’re dealing with a predatory lending company.
The Lender Wants You to Sign Now
If the lender is pressuring you to sign the loan documents without having enough time to adequately go through the terms and conditions, chances are, you’re dealing with a predatory lender.
Predatory lenders thrive on misinformation and lack of detail on the fees, rates, and terms associated with the loan. A predatory lending company will want you to sign the paperwork quickly before you go through the fine print. It’s not until you start making payments that you realize the exorbitant fees tied to the loan.
Unsolicited Loan Offers
Have you been getting unsolicited loan offers through the phone, mail, or even door-to-door sales? Well, you could be dealing with a predatory loan company that wants you to sign up for an expensive loan. You’d be surprised to learn that the company is not even licensed to operate within your state.
Too Good to Be True Promises
If the lending company is offering you a loan without looking at or caring about your credit history, odds are you’ll get a loan with super-high charges and interest rates. While such a loan can fix your immediate need, you risk getting into a vicious debt cycle that will leave you in a worse financial position in the long run.
The Lender Asks to Access Your Bank Account
While many financial institutions may want some proof of auto pay from your bank, they don’t require it as a condition for getting the loan approved. Shady, predatory lenders might actually demand you write a postdated check or allow them to debit funds from your account as one of the conditions of accessing a loan. This can lead to serious overdraft charges from your bank if the lender chooses to deposit the check before its due date or if the loan is not paid off in time.
There Are Prepayment Penalties
You should be wary of lenders who impose massive penalties for early payments and fees for extra items such as insurance. You should also avoid any lender that promises a larger loan if you pay off your loan early. Such tactics are designed to keep you subtly trapped on a debt treadmill.
Your Lender Asks You to Lie
When applying for a loan, it’s a crime to make false claims about your income or debt. However, predatory lenders may encourage you to provide incorrect information or lie about your income.
A legitimate lender cannot condone any false information in your application and would require bank account statements, paycheck stubs, and tax return documents just to ensure that everything in your application checks out.
The Interest Rate Suddenly Rises
Some predatory lender have mastered the art of marketing themselves using below-market interest rates to draw in ignorant borrowers, only for them to introduce hefty interest rates afterward. When applying for any loan, ensure that the advertised interest rates check out with the actual rates when applying.
Avoid any company that advertises low-interest rates but tells you that you don’t qualify for those rates when you call. These are predatory lending practices meant to convince you to sign up for a more expensive loan.
Avoid Any Lender That Guarantees Your Loan Approval
Loan companies use income, employment, and credit score information to qualify borrowers on a case-by-case basis. Avoid any company that guarantees approval of your loan application. These promises are often absurd and only lures you to take a predatory loan with abusive terms and rates.
By looking out for the above red flags, you can avoid predatory lenders. Here are a few things you can do to protect yourself from a predatory lender:
- Compare loan terms between multiple lenders – This isn’t hard to do, just go online and look up similar lenders and get a sense of what their offers are.
- Be wary of aggressive sales tactics – If you’re being pressured to sign something right away or if the salesperson is telling you the offer will be gone if you leave, walk away.
- Read the fine print – Make sure you read the fine print on the loan offer and sleep on it for a few days before accepting the terms to know whether you really need it.
- Get all the facts – Make sure you ask all the questions you need to so you can confidently say you know all about the loan and its rate, fees, etc. BEFORE signing the papers.
- Avoid loans that have balloon payments – A balloon payment is when a large lump-sum is due at some point in the future. Some legitimate companies offer these, but I would be incredibly leery–just avoid these altogether.
- Know your financial position – Go for a loan you can comfortably afford to manage. Don’t overextend yourself because someone is selling you on an idea or a dream. Know what you can realistically afford now, so you don’t get yourself into trouble later.
- Work with trustworthy lenders – Check out sites like the Better Business Bureau and Trustpilot to get a sense of how long the company has been in business and what customers are saying about them.
- Do a background check on any lender you’re considering – You can access public records for all companies in some way. Here’s a good resource on how to find business records quickly.
If you’re looking for a reputable lending company, there are several things you can do to weed out the rogue, predatory lenders, and only remain with trustworthy lenders.
- Check with the state’s consumer affairs department or the state’s attorney general to confirm that the business is licensed to do business in your state.
- Cross-check their business information, including name, phone number, and address, to ensure that the business is who they say they are.
- Ask for their charges, processing fees, and penalty fees, and see if they have a reasonable annual percentage rate (APR).
- Check for the company’s review online on Google, Trustpilot, Facebook, BBB+, and Yelp and see what other borrowers have said about their experience working with the company. Avoid any company with a questionable reputation.
- A reputable company will have a professional customer service area and will be willing to answer any of your questions.
- A reputable company will be interested in your credit information, employment status, and your ability to repay the loan.
If you suspect that you are dealing with a predatory lending company, there are a few things you can do to protect yourself and other lenders:
- Report the company to the state’s attorney general or local consumer affairs office (linked above).
- Submit a complaint to the Federal Trade Commission through their toll-free number: 1-877-FTC-HELP (382-4357).
- File a complaint to the Consumer Financial Protection Bureau.
- Sue the lender – If you have already signed up for the loan, you could file a lawsuit against the company for violating the Truth In Lending Act (TILA) or some state and federal laws. Obviously talk to an attorney for legal counsel on how to go about this.
Predatory loans can lock you in a vicious cycle of bad debt and financial limbo. These loans are not only expensive but can also ruin your credit score and your chances of ever getting a loan from credible financial institution such as banks, credit unions, or P2P lenders.
If you’re in a financial crunch and looking for a loan, make sure that you do your due diligence and shop around to get offers from different lenders. This allows you to weigh the various loan offers available and identify the most viable option that is an excellent fit for your financial situation.
Finally, be sure to read the fine print on the loan offer documents carefully, and don’t sign anything you don’t understand.
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