Predatory lending refers to lending practices that are unfair, deceptive, and, in many cases, fraudulent. The most important thing consumers can do to avoid being victimized by predatory lending practices is to educate themselves about the risks, learn to identify the signs, and report bad actors within the lending industry to the proper authorities in their states. Here’s what you need to know about predatory lending to avoid becoming a victim.

Types of Predatory Lending

There are various forms of predatory lending. Although information on beneficial lending practices is available online, the internet has also made it easier for dishonest lenders to exploit consumers. Here are some examples of predatory lending practices that consumers should be aware of to safeguard themselves.

High-Interest Loans

When loan interest rates are higher, consumers face a greater risk of struggling to repay the loan without experiencing further financial difficulties. The impact of high-interest rates becomes more significant as loan terms lengthen. Avoid falling prey to excessively high or punishing interest rates by monitoring prevailing rates for individuals with similar credit scores.

Payday Loans

Short-term, high-fee loans with lump sum repayments can be cost-prohibitive for consumers. These types of loans rarely take a consumer’s ability to repay the loan into account and directly debit the fees and balance from the borrower’s checking account on the next payday.

Car Title Loans

Short-term loans for small amounts of money require borrowers to hand over the titles to their cars as collateral for the loan. These loans rarely require credit checks as the vehicle as collateral, but they carry high-interest rates that trap many borrowers in debt.

Rent-to-Own

In addition to inflated prices for goods, rent-to-own practices often include higher-than-average interest rates and excessive fees that make the final ownership costs punitive for consumers at best.

Refund Application Loans

Offered by many tax preparation services and other lenders, refund application loans allow consumers to get a portion of their tax refunds quickly rather than waiting for the IRS to process their returns. The fees and interest on these loans are excessive, costing consumers far more money than a traditional loan would charge.

Advance-Fee Loans

These are loans in which “lenders” require an advance fee before closing the loan. In many cases, the promised loan was never realized, and would-be borrowers were simply out the money they paid for expenses.

Warning Signs of Predatory Lending

Big promises are among the first warning signs of predatory lending. Promises that loans are available regardless of one or more of the following factors generally indicate that something is rotten in the lending process:

• Bad credit loans.
• No credit checks.
• Mandatory arbitration.
• Balloon payments late in the term.
• Monthly payments that do not cover the monthly interest.
• Excessive prepayment penalties.
• Blank spaces in the document and rushed efforts to sign and close the loan.
• Promises from “lenders’ that sound too good to be true.

If you’re ever in doubt about a lender or certain lending practices, you can contact the FDIC to ask questions about specific lenders and potentially predatory lending practices.

Consequences of Predatory Lending

Some predatory lending practices are crimes in some states. However, not all predatory practices are crimes in all states. Some states have more punitive consequences for lenders than others. However, consumers are the ones who generally pay the price of predatory lending practices. The internet has made these lenders more sophisticated and give them wider audiences to abuse. From negative marks on your credit report to financial devastation, the consequences of these bad actors are difficult to overcome. Prevention remains the best cure, so educating yourself about current scams and predatory lending practices is your first defense.

Protecting Yourself from Predatory Lenders

The most important thing you can do to protect yourself from predatory lenders is to always read the fine print when considering loans or credit. If an offer seems too good, it probably isn’t good for you or your long-term financial health. Never sign questionable documents, and listen to your inner voice. If you feel uneasy about lending practices or terms, get a second opinion from a trusted friend or advisor. If you still have questions or feel pressured by the lender to sign now, contact the FDIC or your state’s attorney general’s office for guidance.