Predatory loans with impossible payback conditions can trap borrowers in a painful cycle of debt – here’s what you need to know.
Loans help us pay up front for planned and unplanned expenses. But inequity is baked into our financial systems, which means it’s harder for some people to get loans than others. This opens the door for unethical lenders to exploit vulnerable borrowers.
Predatory loans can derail your financial future. Learn to spot the warning signs and protect yourself from predatory lending.
Predatory lending is any lending practice that exploits, deceives, or manipulates a borrower for the lender’s financial benefit. Predatory loans typically involve two key factors:
As a result, a vulnerable borrower is approved for a predatory loan they’ll struggle to repay. This traps the borrower in a cycle of debt, draining them of their finances and/or valuable assets.
While reputable institutions charge higher interest for poor credit, they rarely charge triple-digit interest rates. But predatory lenders will – that’s how they make their money.
Loans with sky-high interest rates are a major red flag. Most personal finance experts cite 36% APR as the upper-limit for an affordable loan. With a predatory loan, you might be charged upwards of 400%.
Lenders are legally required to disclose loan costs and conditions up front. But a predatory lender will misrepresent or hide this information. They may:
Thoroughly review the conditions of any loan before signing. If this information is hard to find or understand – you may be dealing with a predatory lender.
Predatory lenders take advantage of desperate folks. Beware of aggressive tactics that pressure you to act without thinking. They may:
Are you feeling pushed around, pressured, or rushed? This is another red flag you’ve been targeted with a predatory loan.
It’s normal for lenders to charge higher interest rates if you have poor credit. It’s how they protect themselves when they take on riskier financial agreements. It’s not normal, however, to bombard borrowers with credit-based charges.
If a lender hits you with hidden or last-minute fees, and blames it on your credit score, you could be taking on a predatory loan.
Reputable lenders report account activity to the national credit bureaus. Paying your debt as agreed improves your credit and odds of qualifying for high-quality credit.
Predatory lenders usually don’t report to the credit bureaus. This means paying your loan back responsibly doesn’t help your credit score, which keeps you bound to low-quality borrowing.
If a deal seems too good to be true, it probably is. Be wary of lenders who are willing to approve your loan (right now!) regardless of your financial situation. Look for the catch before signing. Hidden costs, high fees, variable interest rates, and excessive penalties are just a few markers of a predatory loan.
It’s easy to make rushed decisions when you’re desperate – and predatory loans exploit this. Take your time, even if it feels daunting. Fully review and research your options to avoid ending up worse for wear in the long run.
It’s always important to do your research before entering a financial agreement. If you’re dealing with a shady lender, you won’t be their first victim. Head to Google and check out what past borrowers have to say.
Get clear on the parameters of any loan before you sign on. Verify the total annual cost and whether there are penalties, repayment conditions, or additional fees you should know about. Don’t borrow more than you can afford and explore the other offers available before you commit.
Local banks, credit unions, and community organizations are often more borrower-focused than major lenders. Explore options available near you – there are probably more than you think.
Build your credit history to qualify for high-quality loans and avoid predatory lending. If you have poor or no credit, it’s never too late. There are ways to build credit quickly. With StellarFi, you can even build credit using the bills you pay each month already.
Lenders look at your credit score to determine if you’re financially responsible. But most bills don’t get reported to the credit bureaus – even if you always pay on time.
StellarFi members can build credit history with rent payments, utility payments, your phone bill, and even your Netflix or Amazon Prime subscription. Stellar reports your positive payment history to the three major credit bureaus: Experian, TransUnion, and Equifax. After all, you pay these bills every month...you should get some credit for it!
Blast off to better credit!
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The StellarFi blog is intended to serve as an informational resource. While StellarFi can help you build your credit, we do not provide financial, legal, or accounting advice. Please consult a trusted advisor for financial, legal, or accounting guidance as needed.