What is predatory lending?
Much like in nature, the predator attacks their prey when they are vulnerable. Predatory lending is unfair and unethical to those they deceive. These lenders often feed on those already troubled to make ends meet, convincing them to agree to misleading terms on a loan the borrower doesn’t necessarily need, want or can afford.
At first glance, some of these loans may seem too good to be true, and that’s because they are. Hidden behind all the legal jargon and fine print is the truth, masked by the bold dollar amounts. You didn’t make it to the top of the food chain to become a target for attack. Learn how to avoid the trap from predatory lenders.
Some of the tactics
- Risk-based pricing
This is often how lenders justify unfair high-interest rates and fees. When they evaluate borrowers, they will argue high-risk credit borrowers should have higher interest rates.
- Credit insurance
This form of credit insurance is designed to cover the loan in case the borrower dies. This can cause the loan to be even more expensive, and convinces the buyer to increase the cost of their payments in order to cover the insurance.
- Payday loans
These loans are short-term loans with high-interest rates. Simply put, borrowers pay excessive interest rates for more money up front which makes them even harder to pay back in a short period of time.
- Loan flipping
This is when the lender convinces the borrower to refinance, despite no added benefit to the borrower, in order to charge additional fees.
What to do
1.) Find another way
If at all possible, try to avoid borrowing money. Interest rates, payments, fees, they all add up, and you’ll end up spending a lot of extra money in the end. Meet with a financial counselor to figure out a way to meet your financial goals so that you don’t have to borrow in the future and create a budget to manage your bills and payments. Cristo Rey features a Financial Empowerment program where a professional financial counselor will sit down with clients and create a plan for free.
2.) Always go over the terms and conditions
Often a way that people get stuck in loans such as these are when they aren’t given the terms and conditions of the money they are borrowing. It’s important to fully understand all components of the loan in order to make a sound decision for the future of your finances.
3.) Advocate for yourself
You have power as a borrower, so utilize it. Lenders are sales people. They make their money from what you pay them in interest, so they want you to borrow. If you feel that fees and rates attached to a loan are unfair, respectfully advocate for lower rates. Loans can be negotiable, and you might be able to save yourself hundreds of dollars with just doing your research and asking.
4.) Take your time
Shop around, weigh your options- see what other lenders can offer you in terms of interest rates and fees before you accept.
Learn more about predatory lending here.