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Course: Financial Literacy > Unit 5
Lesson 1: Borrowing moneyPredatory lending
Predatory lending is when lenders use unfair tactics like very high-interest rates or hidden costs to take advantage of borrowers, especially those who really need a loan and have few other options. This can trap people in a cycle of debt, making it very hard for them to get out. Created by Sal Khan.
Video transcript
- So let's talk a little
bit about predatory lending. And as the word predatory seems to imply, it sounds like something that you want to be very careful about
how you engage in it. So generally speaking, a
predatory lender is someone who is maybe using someone
else's vulnerability to maybe take advantage of them. And it usually is in the form of, there's some vulnerable group. Let's say someone who is short on money, someone who's having
trouble paying their bills, and one of these lenders
might show up and say, "Hey, I know you're in a bind right now. I am here to help. I will lend you this money." And it can be very tempting
for the person in need to borrow that money. But there's usually some very
serious strings attached. One might be some hidden fees. A very common one is
very high interest rates. So sometimes these loans might
be tied to a future paycheck. Sometimes it might be
based on your car's title. So if you don't pay it back,
they're essentially going to get your car and then
they will charge you. They might say, "Okay, you
just have to pay us back 10% in a week, or 10% back in a month." And when someone's in
a desperate situation, 10% in a month or in a week
might not seem like a big deal. But when you think about
it on an annual basis, they're actually paying
hundreds of percent in interest, even in some cases as high as
a thousand percent interest. That's in a world where many
folks with who have access to better credit can get
loans much lower than that. We're talking sub 10% loans, depending on what the interest
rate environment is at, where you might be able to
get a loan at 6, or 7, or 8%? While some of these predatory
lenders might charge, as I just mentioned, 400%,
500%, 600% on an annual basis. Now it's very easy sometimes
to convince yourself that, well, I'm only gonna need
the loan for this week and I'm just gonna pay the 10% back. But oftentimes these lenders
also make it very easy for you to roll the loan over because
if you had to borrow money this week, what's going to
change about your financial situation that when you
have to pay that loan back, that you're not gonna
have to borrow more money the week after? And so they actually
try, in certain cases, to get people into these cycles. So they have to keep
rolling over the loans or maybe have to borrow
more and more money. And so these loans do stay
there for weeks or months, and so you are paying hundreds of percents over what you originally owed. So be on the lookout for this. Hopefully you can go eyes wide open when you find yourself
in a financial bind. And some of these people
come out of the woodwork. And then to be clear,
there's a lot of folks who maybe are in between,
they are legitimate lenders, but if you are not as
good of a credit risk or you don't have assets
to secure the loan by, so you don't have a car title
or you don't have a house because they're taking on more risk, they might charge higher interest rates. And so those might be
interest rates that are more in the teens or you know, 10, 12, 11, 15%, which is still very, very high interest. But I wouldn't necessarily call
them necessarily predatory, but you still have to be
careful about getting into some of those high interest loans as well.