Predatory lending is far less widespread than before the subprime mortgage crisis, thanks to the Consumer Financial Protection Bureau and several regulatory measures like Dodd-Frank. Despite these safeguards, predatory lenders continue to take advantage of the typical person's lack of financial literacy. Read on to discover the warning signs of predatory lending and the steps you can take to safeguard yourself and your loved ones.
Why do banks engage in such "predatory" lending practices? Any activity that reduces a borrower's ability to repay debt while benefiting the lender is considered predatory lending. Loans with exorbitant interest rates, fees, and conditions are a few examples of predatory lending methods.
Predatory lenders prey on financially weak people, trapping them in debt cycles that often result in foreclosure or even bankruptcy. Below, you'll find information on the most frequent types of predatory lending and steps you may take to safeguard yourself and your loved ones.
Risk Factors and Predatory Lending
Methods to protect yourself from payday lenders Becoming a well-informed borrower is your first defense against predatory lenders. Ensure you understand the consequences of missing or being late on a payment and the interest rates in any contracts you enter. Be wary of sales tactics that put undue pressure on you to make a quick decision. Despite the fact that these loans are frequently marketed as a route out of financial difficulties, taking one out typically results in greater debt at a higher interest rate.
Understanding your budget constraints is crucial, especially when it comes to mortgages. If you default on your mortgage payments, you risk losing your money and your home. Never get talked into borrowing more money than you can afford to pay back.
Having a good credit history is also essential. You can achieve this by always paying your bills on time, lowering your credit card and personal loan balances, keeping open accounts you've had for a while, not applying for too much credit, and keeping a diverse range of credit accounts (such as credit cards, charge cards, and installment loans). As your credit history improves, you'll have a better chance of qualifying for loans with favorable rates and repayment terms.
Different Predatory Lending Practices
Instant Cash Advances - Payday loan companies facilitate borrowing against expected future income. If you can't pay back the loan by the due date, they cash the postdated check you send them for the amount you borrowed plus any fees. If you don't pay off the debt when it's due, the APR (interest stated as a yearly percentage rate) can skyrocket to well over 1,000 percent. Avoiding a payday loan is made more accessible when you have a savings cushion.
Other forms of predatory lending are also offered to persons with poor credit who urgently need cash. There are high-interest rates and potentially onerous terms associated with these loans.
Loans from pawn shops - You can get a small loan if you're willing to put up an item of value, like jewelry or a computer. Timely repayment of the loan, including interest, will result in the return of the collateral. Sometimes, you can extend your loan term by paying the interest due. However, the item may be sold if you do not repay or extend the loan. Pawn shop loans have extremely high annual percentage rates (APRs) of 120 to 240 percent. Additionally, many pawn shops may charge you for insurance and storage.
Cash advances based on your vehicle's Title - This short-term loan is secured by your car, so if you fail to repay, the lender can take possession of it without resorting to legal action. The interest rate is usually 25 percent per month, equivalent to an annual interest rate of 300 percent. A savings cushion can keep you from losing your vehicle to a car title loan.
Reason to Suspect Predatory Lending
You can contact the attorney general's office in your state and the Consumer Financial Protection Bureau at consumerfinance.gov or 855.411.2372 if you have concerns that a lender has changed the terms of your loan without your consent, misled you, added products you didn't agree to, or pressured you into taking out a loan with worse terms than you were eligible for.
