Predatory Lenders - How to Spot a Shark

Life happens. We get it. Unexpected expenses can leave you feeling hopeless and alone. Sometimes payday lenders and loan sharks seem like the only option. When you feel stuck and need a loan, know who to turn to. You have the power to control your finances. You do not need to feel stuck in the cycle of bills.

Not all financial institutions are created equal. While some places, like credit unions, are not-for-profit and exist to benefit their members, there are lenders out there who are attempting to make as much money as they can off of their customers. These businesses use unscrupulous practices to squeeze every penny they can out of you. One of the best ways to avoid being prey is it be educated on their business practices and alternative lending solutions from those who have your best interest in mind.

What Is Predatory Lending?

Predatory lending typically means imposing deceptive, unfair, or abusive terms on borrowers. In many cases, these loans carry very high-interest rates and fees, stripping the borrower of equity all to the lender's benefit.

Predatory lenders often use aggressive sales tactics and exploit borrowers’ lack of understanding of financial transactions. Through deceptive or fraudulent actions and a lack of transparency, they entice, induce, and assist a borrower in taking out a loan they will not reasonably be able to pay back.

For example, a loan shark is the archetypal example of a predatory lender—someone who loans money at an extremely high-interest rate and may even threaten violence to collect on their debts. However, a great deal of predatory lending is less obvious and is carried out by more established institutions such as finance companies, attorneys, mortgage brokers, banks, or real estate contractors.

Predatory lenders often target communities where few other credit options exist, which makes it more difficult for borrowers to shop around. They lure customers with aggressive sales tactics. They can often be found in quantity in areas they deem valuable for targeting - think of Asheville Highway in Spartanburg or White Horse Road in Greenville where predatory lenders line the streets eager to catch their next prey.

How To Spot a Predatory Lender

To find out whether your lender is predatory, you need to know some of the common tactics that predatory lenders use. Some of these identifiers may be more obvious, and you can spot them by looking at the physical building or the company’s advertisements. Other identifiers may be in the fine print of the loan, so be very careful and take your time when signing up for any loan or payment plan.

Location and Services - We’ve already touched on one of these identifiers in this blog. Sometimes, you can suspect a lender is predatory by looking at their physical office space and main services. Are they one of several loan offices on a single street? Are these offices clustered around auto dealerships or in poor areas? Think of Asheville Highway in Spartanburg. There are many auto lots in this area, leading to several predatory loan offices lining the street.

What kind of services do these businesses advertise? Do they only advertise loans? What kinds of phrases pop up in their advertising? Predatory lenders will try to make their services sound as enticing as possible, using phrases like “can’t wait for payday?” or “get the cash you need now!” Often, these businesses focus solely on loans and related products, meaning that their business relies on charging you interest. While credit unions and banks offer a wide variety of services like personal accounts and bonds, predatory lenders may only deal in loans or credit. This works in their favor.

Penalties or Promises of Future Rates - Predatory lenders make money by trapping you in a cycle of interest. One way that they do this is by penalizing you for paying off a loan early. A “prepayment penalty” is a huge red flag! This means that you may be charged a fee for refinancing the loan or paying the loan off early, which can cost you thousands of dollars over the penalty period.

The promise of refinancing is also a indicator that you’re dealing with a predatory lender. Refinancing is when your loan is restructured or sold to a different loan holder. When credible financial institutions do this, it often means that you get a lower interest rate or restructure your payment plan that works for you. Predatory lenders may promise that rates will improve in the future and that you’ll have the chance to refinance later on. While you’re waiting for these better rates that will probably never come, you’re stacking up interest and losing money. If a payment plan and the promise of refinancing in the future stretches you too much, just say no to the lender.

Little Personal Information Needed - When a credible financial institution reviews your loan application, we look for a lot of things. We’ll do a credit check, gather personal information to double-check your identity, and maybe ask for information on what the loan is paying for. This is all done to insure that the loan is a safe deal for both the financial institution and the person taking out the loan. Predatory lenders will often boast that they don’t require all of this information to give you a loan. You may not need to provide your credit score or financial history, and the process to receive that money may be very quick.

Don’t let this excite you too much. Predatory lenders make the loan process very quick, in order to rush you into a contract and perhaps not give you time to fully consider the terms of the deal. There will often time be fees that you miss or rates that are not clearly defined in the initial deal. With any financial decision, take your time and understand that one decision made out of desperation may eat at your finances for years to come.

Do You Know What You’re Paying? - When taking out any loan, you should know all fees and interest rates involved. A credible lender will provide this information for you and perhaps even outline how that interest rate will affect your payment plan later on. Predatory lenders will use whatever tactics they can to hide these fees in the fine print, in the hopes that you won’t know how much you owe them until the payment is due.

If something sounds too good to be true, it probably is! Always do your research and make sure that your lender is transparent in their lending tactics.

In Summary

Many people who borrow from predatory lenders know who they’re dealing with. They take out loans due to financial desperation or the promise of money in their pocket. Others, however, don’t know that they’re dealing with a shark until it’s too late.

The best defense against a predatory lender is to know what a legitimate lender looks like and trust your gut when making financial decisions. If something doesn’t feel right or if you feel like you’re being pressured into a decision you’re uncomfortable with, have the confidence to say “not today, thank you” and walk away.

Many credit unions have personal loan options that can help to pay for personal expenses and provide needed funds. Always look into the offerings at a credible financial institution before stepping into the ring with a shark.