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Any financial behavior that puts unfavorable or abusive credit terms on a borrower is known as predatory lending practice. It sometimes refers to any activity that uses misleading, manipulative, abusive tactics to persuade a borrower to accept unfair credit terms for a loan that he obviously cannot afford.
In simple words, predatory practice ignores or otherwise impedes the borrower's ability to meet his contractual obligations in order to gain profit. In addition, such financing strategies frequently try to abuse a debtor's lack of knowledge of financing tools or unawareness of credit terms.
Predatory lenders usually prioritize those with little monthly income and weak credit ratings (FICO scores falling between 580 and 669). However, any of us can be victimized once we don't identify the red flags.
Warning Signs
One of the primary signs of predatory lending practice is unrealistically favorable credit terms. You may come across thousands of advertisements promising credit repair in a couple of months or low-interest loans, irrespective of bad or no credit. These are the most focal signs to consider when dealing with unfair lending practices.
Thus, before entering any legally binding credit agreement, look for hooks. For instance, quickness in exchange for high-cost financing may lock you in a debt cycle, worsening your financial state.
Unclear Annual Percentage Rate
When the lender complicates the credit terms or otherwise doesn't want to disclose how much the financing will cost, you should consider it as a red flag. Any reputable lender will provide you with all credit related-costs (including any origination fees) up front, whether it's an online or storefront dealer.
Lenders operating in the US are forced by law to disclose the loan APR, which is calculated by adding the interest rate and any upfront costs. Thus, avoid dealing with any lender who refuses to provide fundamental information about the product or tries to hide it in a fine print.
No Credit Checks
The next red flag that you need to consider when opting for financing is whether your lender checks your credit before qualifying for a loan. Most reliable lenders apply credit pulls (either hard or soft credit checks) to see your financial behavior and how you handled your debt in the past. Meanwhile, predatory lenders compensate for this risk by imposing high-interest rates, often well beyond three-digit numbers, accompanied by high upfront credit-related costs. All these extra expenses raise the cost of financing, thus making it difficult for a borrower to pay off debt upon the agreed term. In fact, a predatory lender might do the following:
- Not to inquire about your current debts or earnings
- Encourage you to take out a larger loan than you requested
- Apply one-time payments (lumps sum) instead of equated monthly installments (EMI)
- Encourage credit rollovers to increase the cost of borrowing
Loan Doesn't Help Build Credit!
Most lenders report your on-time payments to one or more of three major credit reporting agencies in the US (Equifax, Experian, and TransUnion), enabling you to improve your credit and qualify for better credit terms. Being late on credit repayment or missing a payment, on the other hand, will lower your credit score.
Lenders Force Auto-Withdrawal
Many lenders may ask for access to your bank account to set up automatic payments. This may impose additional charges, such as bank overdraft fees, if you do not have enough cash. However, this is not a solid sign of predatory lending since many reputable lenders ask for access to a bank account in order to promote the benefits of automatic payments and make the borrower's life easier.
Customers Have Previously Complained About the Lender
Always check your lender's reputation on the web and get references, much like you are checking hotel ratings through TripAdvisor. Check your lender with the Better Business Bureau to see whether or not there are any complaints. Mostly look for Federal Trade Commission's scam reports on your lender's name. And finally, check the lender with the Consumer Financial Protection Bureau.
How to Identify a Reputable Lender?
The perfect lender always verifies your ability to meet contractual obligations, offers amounts appropriate for your financial situation, and publishes the whole cost of financing upfront. It also encourages borrowers to pay off debt rather than roll it over for another month or year.
Look at other choices before opting for predatory practice:
- If you are looking for short-term loans, opt for Federal Credit Union loans with low-interest rates and long payback terms. You don't necessarily have to hold a good credit score to qualify, but you must join a credit union.
- Mobile apps like Earnin enable you to get interest-free cash advances (up to $200) from the comfort of your home.
- Charitable firms and religious/community organizations in your area can help you pay for things like rent, utilities, and groceries.
- If you're cash-strapped, first of all, try to borrow from relatives and friends. This is a cheap alternative since you don't have to pay interest or credit-related charges.