What you need to know about predatory loans
In the fourth quarter of 2020, origins in personal loans grew quarter over quarter as total loan balances declined to $ 148 billion in the fourth quarter. Consumers are still scrambling to raise capital where possible, and there are signs that consumer spending is slowing. Within options for accessing finance, the practice of predatory lending should be approached with caution.
Predatory lending is a set of immoral practices by lenders when sourcing a loan. They come in many varieties and all prey on consumers.
These practices include:
- Abnormally high late fees
- 3-digit interest rate such as 400% interest on payday loans
- Fees for a low credit score
- APR not disclosed
- Refinance a loan that looks like a savings but the origination costs are high on the new loan
Most common predatory loan types
It’s common for predatory lenders to provide products that you don’t need. Things like credit insurance are added to the cost of the loan and overinflate the amount you pay. This is part of the effort to create a repetitive debt process that will cause problems right down the line.
Often, borrowers end up assuming new loans to manage an existing loan. This type of borrowing can occur when a borrower is encouraged to borrow even more than he should, through asset-backed loans. Unfair loans target the value of assets rather than income and leave the borrower with limited repayment capacity.
Negative amortization This is how lenders charge consumers monthly payments that don’t even cover interest. The principal is indeed never touched by the repayments, and the borrowers remain stuck on a wheel of the debt which does not cease accumulating.
Protections against predatory loans
Adopted in 1989, Equal Credit Opportunity Act is a bill designed to deal with increasing consumer debt. He created requirements for credit applicants of all types to be considered on the basis of their true qualifications. The vague possibility of reimbursement is not enough. Lenders are required to start looking at what the borrower could repay in terms of income, not personal characteristics.
The Fair Credit Act for Veterans and Consumers also decided to cap consumer loans at an interest rate of 36%. Payday and securities loans that maintained a triple-digit interest rate cycle now had to revise their processes. Access to quick capital is part of the discussion as something that underbanked individuals rely on. This suggestion has not deterred congressional action to isolate consumers from predators. National bank executives have indicated that their lending products do not carry such high interest rates and that this is unlikely to interfere with their operations.
Who is affected by predatory loans?
These types of volatile loan products often target low-income borrowers and communities of color. Abusive loan terms come with access to finance that would otherwise not be available to communities without banks and credit unions. These “legal usurer” companies know this and profit from their practices.
Aggressive sales tactics can be effective with inexperienced consumers unfamiliar with the ins and outs of financial transactions. Plain and simple deception is also part of predatory loans. Banning discriminatory practices is part of consumers’ struggle against these lending instruments.
Subprime mortgages were also available for borrowers with lower credit scores. Even when consumers could not afford them, these loan products were part of promotional efforts.
Protection of borrowers
There are more loan and housing laws that protect borrowers from discrimination. Predatory practices work to find a way. Some of the best protections are to familiarize yourself with your loan documents and the details they contain.
At every opportunity, intensive research is necessary. Predatory loans can follow you for a long time and cause lasting damage. The Consumer Financial Protection Bureau and the Federal Trade Commission have options for your protection. If your business or family is in need of cash, consider all the possibilities and go over the small details. Hidden coins are often the most sinister and can leave you on the hook in ways you can’t pay back. Payday loans, title loans, subprime mortgages and many others have served consumers poorly in a way that is constantly evaluated.
Work with a financial professional who has your best interests in mind. The right financial tools are available through reliable channels. Have a plan and stay committed to taking appropriate action for your money in the future.