How To Spot Predatory Lenders and Scams
See A Great Loan Offer? Proceed With Caution.
Holidays are approaching, and Alaskans are planning to purchase gifts for loved ones and other expenses are coming due. If money is tight and you’re thinking about taking an alternative loan to cover costs, you might want to step back a moment and think long and hard about the ramifications of doing so.
You may be receiving loan offers in your mailbox, email, or sidebar of your favorite website that look pretty good, especially if you need money now for pressing bills. Be aware that this is the time of year when predatory lenders come out of hiding, and they’re very clever at tricking good people into making bad decisions.
What Is Predatory Lending?
Essentially, it is a loan that is very unfavorable to you, the borrower, because it has high fees or unreasonable terms that you would not get from a legitimate lender. Many legitimate financial institutions have some form of emergency loan or alternative that would be far better than a new credit card, payday loan or similar predatory loan. Most people already have an idea of what type of credit card, mortgage or loan they’re eligible for. If you see an offer that seems too good to be true, chances are it is.
How Can You Spot A Predatory Loan?
Predatory lenders are known for making a “hard sell” through advertising, direct mail and even phone calls that aggressively attempt to convince you to take out a new loan. Look out for these red flags:
- The lender is not your bank or another well-known, reputable lender.
- The lender says bad credit doesn’t matter.
- The lender is coming to you, rather than you going to them.
- The loan has large or unusual interest rates and/or fees.
- There is a penalty for paying off the loan early.
- The loan has an adjustable interest rate that can increase significantly later.
Who Do Predatory Lenders Target The Most?
People who are not eligible for a conventional loan from a bank or other reputable lender are particularly vulnerable. A bank makes loans with the expectation that the borrower will be able to repay the loan. So if a credit card or some other organization is willing to give you a loan even though you have bad credit or income problems that should be a red flag.
What About Using a Pawn Shop For Some Quick Cash?
It’s important to be able to recognize predatory lenders that do not outwardly advertise themselves as lenders. Pawn shops may give you a loan that is secured by something of value, which you surrender if you cannot repay the loan within the pawn shop’s timetable and terms. Similarly, a vehicle title loan will likely have a very high interest rate and is secured by the lender holding the title to your car or truck (so if you cannot repay the loan, you lose your vehicle). Make note, legitimate lenders also use collateral to secure a loan and will repossess this item if payments are not made — this is their last resort for collecting, not their first choice or option for you.
Will A Short-Term Loan Really Impact My Finances In The Future?
Yes! In addition to high interest rates, a predatory loan may have unusually high start-up costs and/or fees for activities like checking your balance, making payments, and other things a legitimate lender would not charge. Ultimately, this type of lender makes it difficult for you to completely repay the loan which creates a harsh cycle that could negatively impact your future financial health.
What If I Have Been The Victim Of A Predatory Lender?
Some predatory lending practices are illegal. If you think that you have been the victim of fraudulent lending practices, we encourage you to reach out to the Alaska Legal Services Corporation. They may be able to assist you through legal advice, brief services and representation. Click here for more information.
Where Can I Learn More About Managing My Finances?
The best thing you can do to protect yourself is improve your financial literacy. We have several great resources to help you stay in control of your money now, and plan for the future.
- AHFC: Budgeting Made Easy
- AHFC: Get a Handle on Your Debt
- AHFC: Learn How to Better Manage Your Bills
- AHFC: Financial Literacy Resources
- Learn How to Prioritize Your Spending
- Find Out How to Build Your Savings