Updated: Jun 5, 2019
Predatory lending occurs when a lender uses unfair or deceptive tactics to lead a borrower into taking a loan that carries fees, rates or other terms that benefit the lender at the expense of the borrower. Some predatory lenders may target subprime borrowers — those with credit scores below 630 and low income — but anyone can fall victim to predatory lending.
Here are 5 common warning signs:
1. Is the offer too good to be true?
Be skeptical when a company makes an offer that seems too good to be true. You may see ads from companies promising to mend your damaged credit, settle your debts for less than you owe or give you a cheap loan despite blemishes in your credit history.
Look for the catch before signing any agreement — the price for speed and convenience may be high fees, getting trapped in a cycle of debt or being forced to give up your assets.
2. What does the product truly cost?
One warning sign of predatory lending is when a company makes it hard to know how much the loan will cost. When you navigate a company’s website or visit a branch, you should easily find all the costs associated with the financial product, including prepayment penalties, late fees and other charges. Lenders are legally required to state the loan’s annual percentage rate, which is the sum of the interest rate plus upfront fees.
If basic product information is missing or hidden in the fine print and the lender does not answer your questions, steer clear of the company.
3. Does the lender check my ability to repay?
A lender that forgoes a credit check before offering you a loan does not assess how you’ve handled debt in the past or the potential impact of taking on more debt. Predatory lenders make up for that risk by charging high rates, typically well above 100% APR, and structuring loans with high upfront fees.
In practice, a predatory lender might:
Not ask for information about your existing debts and income
Push you to take a bigger loan amount than you asked for
Have balloon or lump-sum payments instead of fixed monthly payments
Encourage repeat borrowing or rollovers of the loan
4. Does the lender help me build credit?
A good lender should report your on-time loan payments to one or more of the three primary credit bureaus, allowing you to earn a better credit score, lengthen your credit history and qualify for cheaper financial products in the future.
5. Does the lender require electronic payments?
No lender can demand access to your bank account to collect payments. A predatory lender, however, may treat your account like an ATM, making repeated payment requests while you rack up bank overdraft fees if your account is short.