What Is Predatory Lending?

While many lenders are on the up and up, some use predatory lending practices that are deceitful or unfair to convince vulnerable consumers to take out loans. These exploitative tactics often include high interest rates and fees, and can trap borrowers in cycles of debt since it can be very difficult to repay the loans.

What is predatory lending?

Predatory lending financially harms the consumer through unfair, abusive or coercive practices. Common indicators of predatory lending practices generally include very high interest rates and short repayment periods, which can make a loan incredibly difficult to repay.

Predatory lenders tend to target vulnerable demographics, typically those with poor credit, low income and a lack of education. Those who may be vulnerable to discriminatory lending practices based on factors such as age, disability or race may also be susceptible to predatory loans.

How predatory lending practices work

Predatory lenders often reel consumers in with promises of no credit check loans and quick loans with fast access to cash. They may not be transparent about important aspects of the loan such as hidden fees, high interest rates and small loan amounts.

These predatory lending practices may also come with short repayment terms — between two to four weeks. When saddled with high rates and fees, many borrowers struggle to repay the full amount so quickly and end up taking out a second loan to pay back the first.

7 red flags of predatory lenders

While every lender has a different approach to loaning money, there are seven warning signs to look out for that may indicate you’ve found a predatory lender.

1. Triple-digit interest rates and fees: Before you agree to anything, look over your loan agreement with a fine-tooth comb to determine the annual percentage rate (APR) and any fees you’re expected to pay. With payday loans, APRs can get as high as 400%.
2. Balloon payments: These are large, one-time payments due at the end of a loan term and are most commonly associated with mortgage or auto loans. A balloon payment covers the remainder of the loan balance and is generally at least twice the size of the mortgage loan’s average monthly payment. Most personal loans don’t come with end-of-term balloon payments, so this could be a red flag of predatory practices.
3. Short repayment terms: Payday loans have two-to-four-week repayment periods, and car title loans can have 30-day repayment periods. This may not be sufficient time to repay the money borrowed.
4. Lack of transparency: If you can’t determine a loan’s APR by looking into the loan agreement, that’s a red flag. Lenders may try to sneak additional fees into the agreement, as well.
5. High-risk collateral: Small loans and expensive collateral aren’t a good combo. If you can’t repay your secured car title loan, the lender may be able to repossess your vehicle to make up lost money.
6. Loan flipping: Loan flipping happens when the borrower cannot repay a loan and needs to “roll over” their current loan into a new one, which incurs additional fees and begins a cycle of debt that’s hard to escape.
7. Sneaky add-ons: Predatory lenders may try to add unnecessary features and services so they can charge you extra fees.

Common examples of predatory lending practices

Common forms of predatory lending include payday loans and car title loans, although some small-dollar installment loans and other types of lending may also involve predatory practices.

  Payday loans

These small-dollar loans offer consumers access to quick cash to bridge the gap until their next paycheck. Payday loans are popular among consumers who are struggling financially because they don’t require a credit check — just a government-issued ID, a bank account and proof of income.

Payday loans have extremely short repayment periods (typically two weeks), and interest rates can be in the triple digits, often around 400%. Some payday lenders require access to your bank account and will withdraw your loan payment even if you don’t have the funds to cover it, sticking you with overdraft fees and more debt.

Rolling over your payday loan is a surefire way to stay trapped in a cycle of debt. You might consider credit counseling or other alternatives for how to get out of payday loan debt.

  Car title loans

Car title loans also come with short repayment periods and high interest rates, in addition to the risk of losing your car. These loans can range from $1,000 to $10,000 and APR can be as high as 300%.

If you cannot repay the loan within the specified time period — typically 30 days — the lender can repossess your car or offer to roll over the loan for a longer period of time, which will further increase the cost of borrowing.

Eventually, the loan may become impossible to pay back and you could lose your vehicle.

  Subprime mortgages

Predatory mortgage companies can charge high interest rates and excessive fees. For example, they may overcharge for an origination fee, while other lenders may not charge one at all. Beware of vague-sounding fees, such as an “administration fee.”

Predatory mortgages commonly come with balloon payments. These loans have lower monthly payments and one substantially larger payment due at the end of the term. Often, fees increase throughout the life of the loan, making repayment unrealistic if not impossible.

Consumer protection laws against predatory lending

The Consumer Financial Protection Bureau (CFPB) and the U.S. Department of Housing and Urban Development (HUD) are two federal government bodies that push back on predatory lending practices.

However, in some instances, the CFPB has rolled back some of its protective policies. For instance, in a controversial move during the COVID-19 pandemic, the CFPB rolled back its 2017 Payday Lending Rule, which required lenders to make sure consumers could repay their loans within the borrowing terms.

Other federal legislation that protects consumers from predatory lenders include the following:

• Equal Credit Opportunity Act
• Home Ownership and Equity Protection Act
• Military Lending Act
• Truth in Lending Act

Many states also have laws that protect consumers from predatory lending practices, but not all measures are equal. For example, states such as Georgia, New Jersey and New York prohibit payday loans altogether, while 32 states offer little to no protections.

How to avoid predatory lenders

Predatory lenders can bring financial troubles into your life if you’re not careful, but there are ways you can protect yourself before signing a loan agreement.

Research fees and rates

As you shop for bad-credit lenders, look for information related to fees and APR, understand how repayment works and seek other information that will help you make an educated borrowing decision. If you find a lender is less than transparent, it’s best to move on to other options. Look for loan rates under 36%, which many financial experts agree is the dividing line between responsible and predatory lending practices.

Avoid pushy lenders

If you feel pressured to make a fast loan decision, you may be dealing with a predatory lender.

Double-check your loan agreement before signing

Predatory lenders may sneak in additional fees or change your payments at the last moment. Always read your loan agreement to ensure it matches what you agreed to verbally.

Read consumer reviews and complaints

Reviews from other borrowers can help you determine whether you’re working with an untrustworthy company. Searching the CFPB complaint database can also give you insight into whether a company has predatory lending practices.

How to report predatory lenders

If you believe a lender is violating your consumer rights, you can report the company to multiple government organizations:

CFPB

• Call (855) 411-2372
• File an online complaint

Federal Trade Commission

• Call 1-877-FTC-HELP (382-4357)
• Write to: Federal Trade Commission, CRC-240, Washington, D.C. 20580.
• File an online complaint

Contact your state attorney general’s office

How to spot trustworthy lenders

Reputable lenders will be transparent about important loan details, and they will also check to be sure you are in a financial position to repay the debt before approving your for credit.

Before signing with a too-good-to-be-true lender, consider these alternatives:

• Payday alternative loans (PALs): Some credit unions offer these loans as an alternative to predatory payday loans. Payday alternative loans are small, unsecured installment loans, but unlike expensive payday loans, APRs are capped at 28% on PALs.
• Personal loan: Finance experts typically agree that 36% is an affordable max APR. When shopping for personal loans, check the lender’s max APR. If it’s above 36%, there’s a chance the lender is predatory and it may be best to look elsewhere, even if you have bad credit.
• Paycheck advance apps: While this route has its own unique problems, some paycheck advance apps like Earnin, Dave and Chime don’t charge users interest or fees for their services.
• Financial hardship programs: If you’re having trouble meeting your financial obligations, reach out to your lender or card issuer and ask if they offer financial hardship assistance. You may also qualify for government help — such as utility payment support or Supplemental Nutrition Assistance Program (SNAP) — or support from local community organizations.
• Borrow from family or friends: Getting a loan from loved ones can be an easy way to dodge exorbitant fees and interest rates. It’s important to be mindful of how borrowing from friends or family could impact your relationship, so be sure to fully iron out the details of your loan with your loved one.
• Bankruptcy: If you’re in over your head with debt, filing for bankruptcy can provide you with a fresh start. While bankruptcy can stay on your credit report for up to 10 years and will cause your credit score to drop significantly, many consumers may see improvements to their credit after a year of working to rebuild.