What Is Predatory Lending?
The Pachyy Editorial Team comprises a diverse and experienced team of writers, researchers and subject matter experts whose aim is to provide you with useful insights, guidance and commentary on all matters related to your personal finances.
Predatory lending refers to unfair lending practices that you should be cautious about. Predatory lenders might employ dishonest or unethical tactics to convince you to take a loan. These loans can come with unjust terms or be unnecessary for your situation.
Predatory lenders have gained a reputation for bypassing legislation in order to target vulnerable individuals with unfair loan agreements. Unfortunately, such lending can trap you in a cycle of debt with extremely high interest rates and fees. Since the outbreak of the coronavirus, some predatory lenders have taken advantage of the financial hardships faced by many Americans.
Here at Pachyy, we aim to address common concerns and questions regarding predatory lending. The topics we cover include:
- What qualifies as a predatory lending loan?
- What is an example of predatory lending?
- Why are payday lenders sometimes considered predatory?
- Who do predatory lenders target?
- Predatory lending and the coronavirus
Before considering a loan, it is crucial to be aware of the associated risks and understand the types of lending practices to avoid. Our guide is designed to provide you with helpful information about predatory lending, including how to recognize it and how to steer clear of it.
Recognizing Predatory Lending Loans
A predatory lending loan refers to a loan that comes with unfair or sometimes even abusive terms offered by lenders. These practices can cause significant harm and distress to those who become victims. It’s crucial to understand how to identify these loans and avoid them at all costs.
Predatory lending often resorts to deceptive and exploitative tactics in order to convince borrowers to accept alarming loan terms, even when they don’t really need the loan or can’t afford it properly.
Essentially, predatory lending is characterized by practices that primarily benefit the lender while disregarding and often obstructing the borrower’s ability to repay.
Recognizing Predatory Lending: What Are Some Examples?
Understanding the concept of predatory lending is crucial, but it’s equally important to recognize the warning signs that can help you identify such loans. Here are some typical indicators of predatory lending:
- Unreasonably high interest rates
- Additional services and costs that primarily benefit the lender
- Rushed paperwork processes
- Imposing unnecessary fees on individuals with low or no credit score
By being aware of unfair lending practices like those described above, you can effectively identify predatory lenders and safeguard yourself from their exploitation.
Why Are Payday Lenders Sometimes Considered Predatory?
Payday loans in the United States are often deemed as predatory lending due to the potential risks they present to borrowers. Here are some reasons why:
High Interest Rates
Payday loans can come with extremely high interest rates. On average, the interest rate for payday loans is around 400%. In areas without interest rate caps like Las Vegas (Nevada), the average APR can reach a staggering 652%. In Missouri, for instance, an APR of up to 1,950% would be allowed for a $100 loan over 14 days.
Failure to Consider Repayment Ability
Some payday lenders do not assess a borrower’s ability to repay before approving a loan. As a result, borrowers may end up taking loans that they cannot afford, leading to a cycle of debt with exorbitant fees. This can also negatively impact their credit records, making it challenging for them to access credit products in the future.
Additional Fees
Payday loans often come with hidden fees that can burden borrowers further. These may include charges for rollovers, late fees, or extra fees for loading funds onto a prepaid credit card.
Who Are the Targets of Predatory Lenders?
When it comes to targeting victims, predatory lenders typically have specific groups in mind. They employ various methods such as online ads, social media campaigns, and personalized promotions to attract individuals who may not be aware of their intentions. Unfortunately, these lenders commonly aim at minorities, the elderly, those with limited education, and individuals who are economically disadvantaged.
Protecting Yourself from Predatory Lending during the Coronavirus
Unfortunately, predatory lending has become more widespread due to the impact of the coronavirus pandemic. Some lenders are taking advantage of people facing financial difficulties caused by the virus and engaging in exploitative lending practices.
The Wall Street Journal recently released a report, revealing that borrowers are being targeted with exorbitant interest rates exceeding 100%.
Payday lenders are specifically targeting vulnerable individuals in areas heavily affected by COVID-19. Even though Google and Facebook have banned payday lending promotions, these advertisements can still be found on both platforms.
The Center for Responsible Lending strongly advocates for limiting interest rates to 36%. This rate cap is already in place for payday loans provided to military members. Ashley Harrington, the director of federal advocacy for the Center for Responsible Lending, expressed grave concern over predatory lending behavior, stating, “At this critical time, enabling predatory lending makes absolutely no sense given the economic, social, and political challenges we face.”