Predatory lending is any kind of lending that gives people loans with unfair or abusive terms. This includes high-interest rates, huge fees, and terms that take away the borrower’s equity. As the name suggests, lenders just take advantage of people who are desperate for loans by using deceptive methods and pretending to help them. Contrary to what many assume, loan sharks aren’t the only predatory lenders. A lot of predatory lending is done by well-known companies or institutions like banks, finance companies, mortgage brokers, lawyers, and real estate contractors. To ensure you don\u2019t fall victim to such practices, this guide is detailed to highlight everything you need to know about predatory lending, its examples, a list of some of the lenders involved in it, and how to avoid or get out of one.<\/p>
Predatory lenders exploit borrowers by taking advantage of their weaknesses or rather, desperate need for loans. Your credit score won’t improve as a result of this loan. When it comes to predatory lending, they are actions taken by lenders that encourage borrowers to take out loans that they cannot afford. They also come with exorbitant interest rates over the going market rate and fall under the category of predatory lending. <\/p>
For example, a borrower who is about to lose his home to foreclosure might run into a loan shark who will take advantage of his situation. He will charge him very high-interest rates, and sometimes even use physical force to get the money back. According to Investopedia, larger, more reputable businesses like banks, finance companies, mortgage brokers, lawyers, or real estate contractors are more likely to engage in predatory lending.<\/p>
Another name for predatory lending is abusive or unfair lending practices.<\/p>
The following are some of the signs of predatory lending practices;<\/p>
The keys to avoiding falling for predatory loans are knowledge and essential research. Make sure you understand any loan agreements you sign and figure out how much you will have to pay back. If you don’t want to be a victim of predatory lending, you have to take matters into your own hands. There are certain signs that you must look out for to ensure that you don’t become a victim. As always, remember that it’s better not to be a victim than to try to get out of such an agreement. To avoid predatory lending, you need to know the signs of a predatory loan. Additionally, you need to be financially intelligent, borrow money wisely, and also know what your options are.<\/p>
There are also laws that control these kinds of loan terms, which means you need to be financially literate. However, predatory lending keeps growing even as these laws are put into place. The following warning signs or red flags you should be on the lookout for;<\/p>
One of the tactics that predatory lenders use to lure clients is making exaggerated offers. In other words, they are simply too good to be true. Imagine having a very bad credit report, but someone still offers to lend you money regardless of your credit history. Some of these tactics include the promise of fast money, easy approval, or very low-interest rates to get you to borrow money from them. Of course, there is always a catch that could severely hurt your credit history. This may include high fees, interest rates that skyrocket after a few months, or the need to put up collateral, such as your home or car. <\/p>
Once you notice their cost is not disclosed, run. Reputable lenders tell you everything about the costs of a loan, including the annual percentage rate (APR), the length of the loan term, the fees, and any prepayment penalties. This is another potent way of identifying predatory lenders. and if you can spot them, you can avoid them. You should look for a new lender if the current one isn’t providing you with all the information you need to make an informed decision about the loan.<\/p>
The MLA across several states has mandated that loan interest rates cannot exceed 36% APR. I won’t dispute the fact that you needed money urgently, which explains why you want to take any options available, but hey, you need to carefully consider every rate and fee charge that applies to your loan before accepting it. Your loan is likely unaffordable if the interest rate is higher than that or if it starts low but could increase considerably in the future. Watch out for prepayment penalties that are too high, fees that exceed the loan’s principal, and “bundled” services like credit insurance.<\/p>