CREDITFRAUDLIFESTYLE & TRAVEL

Steer Clear of Predatory Lending

Predatory lending can come in many different forms. The lure of guaranteed approvals and quick cash means many consumers fail to realize exactly what terms they are signing up for.

Need cash in a flash? No credit? We approve everyone! These catchy phrases are often used by predatory lenders as marketing tactics to reel in their next customer.

Predatory lending can be found in many different forms ranging from payday lending to vehicle title loans. Since predatory loans seem quick and easy to receive regardless of your credit situation, many consumers fall victim to these types of loans every day causing them to overspend on interest and fees.

Let’s start with payday lending. A payday loan or a cash advance is a short-term, high-interest loan that requires no credit check and provides quick cash now with the agreement that the loan will be paid back on the borrower’s next payday. The biggest downfall for these kinds of loans is the high interest rates and short repayment terms. Consumers turn to these types of loans needing a quick resolution to a financial emergency and most of the time get stuck in the payday lending cycle. This happens because they need money now and when it comes time to repay the loan, they simply cannot afford to pay back the loan and still have enough money left over to live on and pay their necessary expenses.

According to the Consumer Financial Protection Bureau (CFPB), 80% of payday loans are rolled over or followed up with another loan within a 14-day period. Again, leaving consumers to pay much more out of pocket for the interest and fees. Interest rates on payday loans can range from 300% to over 700% based on the amount of money borrowed. For example, a $100 payday loan may be assessed a $15 finance charge or fee. When we do the math, that equals an interest rate of 391%. On a $600 loan with a fee of $76, 700% interest is being charged.

Another type of predatory lending involves auto loans. The slogan, “We approve everyone regardless of credit!” should be a sign to run. These types of loans can be dangerous if you don’t read the fine print or understand what you’re signing up for. When people believe they have bad credit, they often won’t talk with their credit union or bank about getting approved for an auto loan due to feeling ashamed or like asking for a loan is pointless. As a result, it’s not uncommon to turn to predatory lenders instead because of the lure of guaranteed approvals regardless of credit. Many times, when people utilize these lenders, the loan approval comes at a high cost which could include a large down payment and a very high interest rate. Interest rates on auto loans with this type of company can start at 12% and go as high as 30%, which is much higher than 6.61% of the average auto loan interest rate for new cars according to NerdWallet.

So, what are some alternatives to these high-interest loans? When it comes to payday lending, one option could be to check with your financial institution to see if they offer a flex loan or a small personal loan you could apply for. This would allow you to borrow the funds you need and pay the loan back over a few months compared to a few weeks with a payday loan. Another option could be to ask a trusted friend or family member to borrow the money with a plan for repayment. It’s never easy to ask to borrow money, and it takes a lot of vulnerability to do so, but taking the leap and asking could save you a lot of money in fees down the road. When it comes to auto loans, a good rule is to always check with your financial institution when you’re interested in borrowing money, because most of the time they will offer lower interest rates and take the time to explain loan terms more thoroughly.

Sources:

 https://files.consumerfinance.gov/f/201403_cfpb_report_payday-lending.pdf

https://www.experian.com/blogs/ask-experian/what-is-a-buy-here-pay-here-dealership/

https://www.nerdwallet.com/article/loans/auto-loans/average-car-loan-interest-rates-by-credit-score

https://www.michigan.gov/consumerprotection/protect-yourself/consumer-alerts/credit/payday-loans