Typically, predatory lending can be defined as imposing unfair, deceptive, or abusive loan terms on borrowers. An article from Business New Daily has defined predatory lending as when “money lenders use unfair, deceptive or fraudulent practices to entice borrowers, typically those most in need of cash, into taking a loan from them, whether it be for homes, cars or everyday expenses.” In short, this means that such lenders take advantage of borrowers’ lack of circumstance, knowledge or need for emergency cash for their own exploitation.
This could mean imposing loans that carry high-interest rates and fees, strip the borrower of equity, or place a creditworthy borrower in a lower credit-rated (and more expensive) loan – all to the lender’s benefit.
What Are Predatory Lenders and How Do They Work?
For all the damage they can cause, you may wonder how it is that predatory lenders find a way to lure in their customers.
By always ensuring a lack of transparency and by using deceptive or fraudulent actions, predatory lenders entice and assist a borrower in taking out a loan they will not reasonably be able to repay. Then, these lenders often use aggressive sales tactics and exploit borrowers’ lack of understanding when it comes to their finances and financial transactions.
The archetypal example of a predatory lender is a loan shark – this is someone who loans money at an extremely high-interest rate and may even threaten violence to collect on their debts. Although some loan sharks may work on a much smaller scale, a great deal of predatory lending is carried out by more established institutions such as finance companies, banks, attorneys, mortgage brokers, or real estate contractors.
Why Should You Avoid Predatory Lenders?
The high-interest fees set out by predatory lenders can result in financial damage for individuals. In severe cases, those that cannot repay such loans may end up losing jobs, damage relationships or even end up homeless if the loan leaves them in crippling debt.
Generally, it is best to avoid predatory lenders as they can lead to:
- Very bad credit scores
- Unmanageable debt
- Long-term debt
- Relationship problems
- Lack of employment in the future
- Homelessness
There are a variety of negative consequences of using a predatory lender. The high-interest rates and excessive fees they may apply will leave most borrowers unable to repay the loan, alongside accrued interest, and may trap them into further debt.
How Can I Avoid Predatory Lenders?
Unfortunately, it can be very difficult to locate a predatory lender when you need to borrow money, due to their abilities in disguise and deception and there is no one thing that you can do to identify them. However, there are several indications you can beware of when trying to avoid such lenders – if you detect anything related to the list below, you may be dealing with a predatory lender and should be quick to cut off the relationship. It would be wise to follow a few simple steps in this regard:
- Do your research – Unsurprisingly, doing your research is the first and perhaps most important step you must take. Never just take the first deal that comes your way – make sure to look at loans from several lenders and research them thoroughly. Check that they are licensed, check if they have certified reviews and try speaking to those who have borrowed from them in the past – perhaps a family member or friend.
- Beware of signing a contract – Never sign a contract until you have read it and are in complete understanding of it. Once you have signed your name, it can be very difficult to get out of. Beware of suspicious contracts that leave blanks to be ‘filled in later’, as this is a method predatory lenders may use to rope you in.
- Watch out for threatening behaviour – This will be a big sign of predatory lenders and you must always take it seriously if it happens to you. This may include harassing phone calls or door-to-door solicitations. Most reputable licensed lenders will not make offers this way and if you do receive such offers, they may be from unlicensed lenders and are best ignored.
- Beware of three-digit interest rates – Sky-high interest rates are a big signal of a predatory lender. High-interest loans can cause balances to grow higher than a consumer can handle, leaving them trapped in a revolving cycle of debt.
- Trust your gut instinct – Don’t be afraid to simply walk away if something doesn’t feel right. If a deal sounds shady or too good to be true, then this may be the case and you would do well to walk away – if it doesn’t feel or sound right, don’t do it. There will always be other lenders available to you if this one is not safe.
Of course, it can be tricky to navigate through predatory waters, but you must never lower your knowledge and instincts. Perhaps it would be a good idea to take financial advice if you still feel unsure if you are being taken advantage of. But most importantly, trust your gut instinct and only follow through with options that you can be certain are safe and to your benefit.
