How to Avoid Predatory Lending

With many American’s credit scores suffering in this financial climate, predatory lending has begun to become more and more of a problem. Often with brick and mortar stores in low income neighborhoods, predatory lenders often wrangle in consumers who believe they cannot get a loan anywhere else because of their credit or income situation.

Predatory lenders typically do three things that, though not illegal, are considered extremely unethical by other, more reputable lending institutions.

  • They engage in deceptive marketing strategies and tactics to persuade borrowers to either refinance or take out loans they can’t afford.
  • They convince borrowers to refinance so they can charge exorbitant fees.
  • They use a borrower’s assets as the deciding factor as opposed to their ability to actually repay.

How do you avoid predatory lenders?

No doubt about it, it’s tricky, but there are some things you can do and look out for. They are:

  1. Shop around. Don’t assume that no other lending institution will loan you money. This is never the case.
  2. Recognize when a lending institution is targeting your specific demographic. Is it renting retail space right in the center of your neighborhood? Chances are it’s where it is for a reason. Many of these ‘help-the-little-guy’ establishments are exactly the opposite of what they say.
  3. Turn away if they have prepayment penalties. Not every company that does this is what we would call a predatory lender, but more than a few are. A prepayment penalty is when you repay your loan long before the loan term comes to an end. You think it would be a good thing, but it’s not to lenders who make most of their money off of interest.
  4. Don’t sign anything before you read it, and ask questions if you don’t understand. If the lender tries to speed talk his or her way through the explanation, ask them to slow down and explain it a different way.
  5. Avoid balloon payments. A balloon payment is a one time payment that is often a lot larger than the other monthly payments. There are many sneaky things lenders generally do if you can’t make this overly large payment. Remember what we said about assets in the previous section? If you used your car title to get the loan, expect them to repossess your vehicle after you miss this one time, large payment.

All in all, be smart and patient before taking out any type of loan. If your credit truly is low, know that it doesn’t have to be and that there are things you can do to improve it.



Lauren Ward is a widely featured author with her work gaining a presence on top media outlets like CBS News. She has been in the content writing business for almost a decade. She writes attention-grabbing content focusing on subjects like personal finance and lending. Read more >

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