Borrowing money in this economy is not easy. But even if you are desperate to get a loan, don't let your guard down. Predator creditors are on the loose.
These unscrupulous lenders prey on borrowers using deceit, manipulation, sales pressure and even fraud to get their victims to sign on the dotted line.
The hallmarks of a predatory loan are exploitation and entrapment: These loans have sky-high interest rates and target consumers who have little ability to repay, such as the elderly, people with limited education, those with weak credit histories and other low-income groups, according to the Center for Responsible Lending, a nonprofit research group based in Durham, N.C.
While predatory lending is often associated with payday loans and subprime mortgages, the practice can be found with any loan. And new schemes are cropping up every day -- online and off.
Predators of all stripes
According to the center, predatory lending practices can happen in a wide range of loans, including home improvement, auto financing, car title, tax refund anticipation and payday loans.
Don't be fooled into thinking that predators are lurking only in back-alley storefronts or on flashy websites. There is a growing trend among some large, reputable banks to offer high-cost, short-term "payday" loans as well, says Kathleen Day, spokeswoman for the center. These loans are typically called "account advances."
"These loans can have an APR (annual percentage rate) in the triple digits," Day says, referring to the types of short-term, high-interest loans that some banks are offering.
For example, one bank's "checking account advance" loan charges $2 in interest per $20 borrowed (with a $35 late fee), which must be paid back within 10 days. Taking out a $400 loan would cost $40, which calculates to a staggering 365% APR.
"All high-cost, short-term loans trap people. Steer clear of these loans," Day says. "They are designed to make you come back over and over again for more loans."
Look for red flags
While borrowers should be wary of any short-term, high-interest loan, regardless of its source, predatory practices on long-term loans, such as auto loans or mortgages, also can entrap the unsuspecting.
Tom Alexander, an associate professor of finance at Northwood University in Midland, Mich., says predatory loans have recognizable red flags.
Be on the alert if the lender allows you to borrow more money than you can afford or asserts that bad credit isn't a problem, he says. Suspect a predatory loan if the lender asks you to fudge or make false statements on your loan application, asks you to sign blank documents or a document with blank spaces, or discourages you from reading the fine print, Alexander says.
Steve Wolf, a certified fraud examiner and executive director of Capstone Advisory Group in Washington, D.C., says borrowers should also be wary of any lender that:
- Charges excessive fees or penalties if the loan is refinanced or payment is late.
- Puts in fine print that the borrower cannot take legal action against the lender.
- Adds unnecessary insurance or financial products to the loan.
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