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Course: Financial Literacy > Unit 5
Lesson 1: Borrowing moneyPredatory lending
People in dire need of money may be tempted by predatory lending, but it's important to remember the risks. High-interest rates and hidden fees can quickly trap borrowers in a cycle of debt. Always watch for red flags and explore safer borrowing options first.
What is predatory lending?
When people are in dire need for money, they may be tempted to take out a loan from a lender who doesn't have their best interests in mind. This is called predatory lending. The lender might make it seem like they are helping someone out in a tough situation, but really they are taking advantage of them.
People may use predatory lending for a variety of reasons. Maybe they lost their job and need money to pay their rent, or they need to fix their car so they can keep getting to work. Sometimes people need money to pay for an emergency medical bill. Whatever the reason, these people are vulnerable, and predatory lenders know it.
Dangers of predatory lending
One of the biggest dangers of predatory lending is that it usually comes with very high interest rates. This means that even if someone is able to pay back the original amount they borrowed, they'll also have to pay a lot more on top of that. In some cases, the interest rates are so high that the person might never be able to pay it all back.
Here are some examples of types of lenders that are often considered predatory, and the interest rates they may charge.
Payday lenders
Payday lenders often charge exorbitant interest rates, with the annual percentage rate () averaging around
Car title lenders
Similar to payday lenders, car title lenders often charge extremely high rates of interest. The average APR for a car title loan is
Subprime mortgage lenders
Subprime mortgages are generally offered to borrowers with poor credit histories, and they often come with high interest rates to compensate for the increased risk to the lender. For example, prior to the financial crisis in 2008, subprime mortgage rates often ranged from
Other dangers
Overall, it's important to note that predatory lending rates can vary widely, and that even if a rate doesn't seem astronomically high, there may be other aspects of the loan (such as hidden fees or aggressive collection practices) that make it predatory in nature.
Another danger is that the lender might pressure the person to take out more loans to pay off the first one. This can lead to a cycle of debt, where the person is constantly borrowing money just to stay afloat. The more they borrow, the more they owe, and it can be almost impossible to escape.
How to recognize predatory lending
It's important to know how to recognize predatory lending so you can avoid it. Here are some things to watch out for:
Extremely high interest rates
Predatory lenders often charge extremely high interest rates that make it difficult or impossible for borrowers to repay their loans.
Hidden fees and charges
Another common tactic of predatory lenders is to include hidden fees and charges in the loan agreement, which the borrower may not realize until it's too late.
Targeting vulnerable populations
Predatory lenders often target people with low incomes, bad credit, or those who are otherwise in difficult financial situations. They may also target specific communities, such as people of color or immigrants.
Aggressive marketing tactics
Predatory lenders may use aggressive marketing tactics to lure people into borrowing money. This can include high-pressure sales pitches, excessive phone calls, or misleading advertisements.
Encouraging repeated borrowing
Some predatory lenders may encourage borrowers to repeatedly take out new loans in order to pay off existing ones. This can trap people in a cycle of debt that is difficult to escape.
Little regard for the borrower's ability to repay
Predatory lenders may not take into account whether or not the borrower will actually be able to repay the loan. They typically do not ask to check a credit score.
Conclusion
It's important to be careful when borrowing money. Always make sure you know the terms of the loan, the interest rate, and all the fees. If something doesn't seem right, don't borrow the money. There are other options out there that don't involve predatory lending.
Want to join the conversation?
what is the best way to get a loan?(7 votes)
"Best" is a rather ambiguous term. I suppose the "best" way would be to get one interest-free from a relative.
After that, you approach a bank, where the terms will be set by contract.
Borrowing from a "non-bank" (a check cashing place or a pawn shop) has distinct disadvantages.
Putting things on a cresit care is expensive,
and borrowing from gangsters is life-threatening.
So, if your relatives wont give you a loan based on your relationship to them, the bank is your next best bet.(12 votes)
How old do you have to be to get a loan?(3 votes)- You must have resources of your own in order to get a loan. A resource can mean a job, a valuable object, or an account somewhere with some money in it.(5 votes)
Have you ever used a payday loan?(2 votes)- I have not used one, but I was forced to learn about them when my sister, who had a guaranteed monthly disability payment coming in, got hooked on "getting money early at the payday loan place." Once she was hooked, she was perpetually broke.(2 votes)
what is the best way to get a loan how old does the loan take.(1 vote)- Demonstrate to a lender that you are in a position to be able to repay the loan in full (plus interest) and on time. If you have no job or resources, that does not demonstrate your potential to pay back the loan in full (plus interest) and on time.(4 votes)
What is the best way to get a loan(2 votes)
what is the best way to get a loan?(2 votes)
So does Predatory lending also count for like friends?
Like you could be in a tough spot and they try and make you think they are helping you but they actually are just trying to get money?(1 vote)- Predatory lending is a condition where someone, a moneylender or a loan shark, sees your distress and relieves it with a loan that costs you more than it was worth. Predatory lending might be legal, as through a rent-to-own arrangement or from a payday lending place. But it will basically suck the life blood out of you.(3 votes)
what is the best way to loan to a payday loan if you don't want a high interest rate.Also payday loans aren't that bad right maybe only 500% if you actually used one(1 vote)- Payday loan places are bad for you. They are legal, but they trap you. Don't even get started.(2 votes)
why be a money shark but not be concerned if the prey can pay you back? Im specifically talking about this section: "Little regard for the borrower's ability to repay"(1 vote)- Loan sharking is partly about getting the money back, partly about the extortionate interest rate, and mostly about exerting power over weaker people.(1 vote)
So what is the difference between loan sharking and predatory lending(1 vote)- In predatory lending, your assets and future earnings are put at risk. When you deal with a loan shark, your life (or maybe just your knees) are at risk.(1 vote)