What is Predatory Lending?
Predatory lending is offering loans with sky-high interest rates and excessive fees, convincing customers to take unneeded loans, or using any other deceitful or unethical tactic.
Payday loans, car title loans and subprime mortgages can often have predatory terms or use deceptive lending practices.
These can be a trap for consumers, so it’s worth learning how to avoid predatory lending and find alternatives.
- Predatory lending means offering loans with very high interest and fees or other unfair terms.
- They often target minority, elderly and low-income borrowers.
- State and federal laws protect against some predatory lending practices.
What is predatory lending?
Predatory lending means pushing borrowers into unfair loans or unnecessary debt by using deceptive or unethical tactics.
Predatory loans usually have incredibly high interest rates, a lot of fees and short repayment terms that can trap borrowers in a cycle of debt.
Predatory lenders might lure you with promises of fast access to cash and no-credit-check loans. But they aren’t usually transparent about hidden fees, high interest rates and total costs — and they make it easy to continue borrowing.
Predatory lenders tend to target minority communities, people with low income or less education, the elderly and borrowers with poor credit or urgent financial needs.
Fortunately, several laws offer some protection from predatory lending practices:
- Equal Credit Opportunity Act: bans discrimination in lending
- Home Ownership and Equity Protection Act: limits high-cost loan terms
- Military Lending Act: caps interest rates for service members
- Truth in Lending Act: requires clear loan disclosures
Many states also have their own anti-predatory lending laws, and almost all states cap interest rates for small- to midsize installment loans.
How to spot predatory lending practices
One or more of these features could be a red flag for predatory lending:
- Sky-high interest rates: Predatory loans can have triple-digit annual percentage rates (APRs), with interest on payday loans reaching 400% or more. By comparison, the APR on personal loans from reputable lenders is unlikely to be above about 36%, and credit card interest rates usually range from 12% to 30%..
- Balloon payments: Some predatory loans have balloon payments — large lump sums due at the end of the loan term. Balloon payments are sometimes found in subprime mortgages or auto loans. Borrowers may struggle to make the final payment, forcing them to refinance or else default on the loan.
- Loan flipping: If a borrower can’t pay a loan when it’s due, predatory lenders may encourage them to refinance or “roll over” the loan into a new one, possibly with higher fees or rates. Borrowers can become trapped paying interest on an endless cycle of expensive debt without reducing the amount they owe.
- Extremely short repayment terms: Borrowing periods on some predatory loans, like payday or car title loans, can range from 14 to 30 days. These tight terms can lead to missed payments, fees or loan rollovers that trap borrowers in a vicious debt cycle.
- Lack of transparency: Predatory lenders may leave the borrower unclear on the key loan details like the APR, fees, repayment schedules, total loan cost and other terms. Lenders may also rush or pressure borrowers, promising that they can refinance if the loan becomes unaffordable.
- High-risk collateral: Some predatory loans, like car title loans, pawn loans and subprime home loans, use your valuable assets to secure the debt. If you fail to repay, you risk losing your property. Not all collateral loans are predatory, but those that carry high interest rates can lead to repossession or foreclosure.
- Hidden fees: Sneaky or excessive charges such as processing fees, late fees, prepayment penalties and add-on insurance or services are common in predatory loans. These fees increase the total loan cost and contribute to the extremely high APRs.
How to report predatory lenders
If you suspect a lender has been dishonest or has violated your consumer rights, you can report them to one of the following:
-
The Consumer Financial Protection Bureau (CFPB)
- 1- 855-411-2372
- Submit an online complaint
-
The Federal Trade Commission (FTC)
- 1-877-FTC-HELP (382-4357)
- Submit an online complaint
- Your state attorney general’s office
- Your state’s consumer protection office
Examples of predatory loans
Payday loans
A payday loan or “cash advance loan” is a short-term, high-cost loan, usually for $500 or less and due on your next payday (in two to four weeks). They often lack credit checks, making them easy to get but risky.
To get a payday loan, you usually need a post-dated check or authorization to withdraw the repayment, plus fees. Fees range from $10 to $30 per $100 borrowed, which translates into APRs as high as 400%. Some states regulate payday loans, while others ban them.
Car title loans
A car title loan usually lasts 15 to 30 days and uses your vehicle as collateral. Loan amounts typically range from 25% to 50% of the vehicle’s value.
To get a title loan, you provide your vehicle title, proof of insurance and sometimes a duplicate key. Title loans are costly, with finance fees as high as 25% per month (for an APR of about 300%). If you fail to repay, the lender can repossess your car.
Subprime mortgages
A subprime mortgage is designed for borrowers who don’t qualify for traditional home loans. Lenders charge higher interest rates than mainstream loans, and many have adjustable interest rates which can rise over time.
Because borrowers might struggle to meet their payments, subprime mortgages can be risky, especially if they include features like interest-only periods, negative amortization, balloon payments and high upfront fees.
A rise in subprime lending led up to an explosion of defaults that caused the housing crisis and Great Recession of the late 2000s.
Options to avoid predatory lenders
The promise of fast loan processing and no credit checks may be enticing, especially in an emergency or urgent financial situation. However, signing on to predatory loans will likely lead to an expensive cycle of debt. Here are some alternative financing options to help you avoid predatory lending.
- Payday alternative loans: Payday alternative loans (PALs) are small, short-term personal loans offered by credit unions as a safer option to payday loans. They typically have lower interest rates (capped at 28% or even lower in some states), as well as easier repayment terms and limited fees. To find one, check with your local federal credit union.
- Credit card cash advances: Many credit cards let you take a cash advance, drawing cash from an ATM or bank branch, up your credit card’s limit. They are generally safer than predatory loans, but they’re still expensive, with a typical cash advance APR at around 29.99%, and fees from 3% to 5% of the loan amount.
- Paycheck advance apps: Paycheck advance apps let you borrow some of your regular pay (usually up to $500), with optional fees and tips instead of interest charges. Instead of running a credit check, paycheck advance apps review your bank account to see if you’re eligible.
- Personal loans: A personal loan is offered by a bank, credit union or online lender, with a fixed interest rate and a set repayment term. Some give you quick access to cash, and they offer lower rates than payday loans, usually maxing out at about 36%, even for borrowers with bad credit.
- Buy now, pay later apps: Buy now, pay later (BNPL) apps let you make purchases and split the payments into installments — usually interest-free if you pay on time. Popular apps include Affirm and Klarna.
- Borrowing from friends or family: Getting help from friends or family can be the least expensive way to borrow, but it’s important to communicate clearly. Set repayment terms upfront to avoid misunderstandings. Treat a family loan like any other loan and always honor the agreement.
Frequently asked questions
Predatory lending practices can include extremely high interest rates, excessive fees, extremely short terms and misrepresented terms.
Predatory lenders may also pressure borrowers to take out the loan without making sure they can afford it or push them to roll the loan over into a new one if they can’t pay on time.
To escape a predatory loan, review your contract for the terms and options for paying it off.
If the loan is covered under the Truth in Lending Act, you may be able to back out within the first three days. If you can no longer afford the payments, you could try to negotiate better terms with the lender, seek financial counseling or consolidate with a personal loan.
You can also report the lender to the Consumer Financial Protection Bureau (CFPB) or your state attorney general’s office if they violated your rights.
You may have a predatory loan if you’re paying extremely high interest rates, have a short repayment term (two to four weeks) or if you were able to get the loan without a credit check.
Signs of predatory lending also include pressure to borrow, excessive fees, prepayment penalties, unclear loan terms and encouragement to roll over the loan.
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