Loan and Credit Scams: How to Avoid Predatory Lending Practices

Last Updated on August 17, 2023

When people are in difficult financial positions, they may let their guard down about watching for scams. They may be desperate to find a way out of the situation as quickly as possible.

Unfortunately, predatory lenders bank on this when trying to convince you to agree to a loan that is a bad deal for you and potentially crippling financially.

Lenders who engage in these practices do everything possible to make the loan seem like a good idea. 

However, when the time comes to begin making payments, it quickly becomes clear that the lender was not being entirely honest.

Unfortunately, by that time, you are already locked into a predatory loan, sometimes legally.

We’ll discuss the different types of predatory loan scams and practices that unscrupulous lenders try so you can take steps to protect yourself.

đź’Ż Act Now: One way a predatory lender can affect you is via identity theft. Protect your identity and personal information from loan and credit scams by signing up for Aura today.

Loan and Credit Scams

Photo by Andrea Piacquadio

What Is a Predatory Loan?

A predatory loan places unfair terms on the borrower, making it extremely difficult ever to make progress against the loan’s balance. 

According to a Vanderbilt University study, predatory loans can have annual percentage rates (APRs) of interest as high as 600%. Yet more than ten million Americans use them annually.

Some people can use these loans successfully to work through a sudden, short-term financial situation. However, because predatory lenders often target people with financial struggles already, the loan often just makes their problems far worse.

Some of the hallmarks of a predatory loan include:

  • Fees for services you don’t need
  • High fee amounts
  • High-interest rates
  • Interest rates may rise significantly after a certain period
  • Balloon payments
  • Extremely short repayment terms
  • A collateral requirement that has a far greater value than the amount of the loan
  • Penalties for paying back the loan balance early

The lender may purposefully try to harm your credit score through the loan terms. The lender may also put language in the loan that allows them to them increase fees and the interest rate even further because of your poorer credit score.

Actions a Predatory Lender Takes

The predatory lender may purposefully mislead you about the terms of the loan. You may not be allowed to spend time reading through the documents yourself.

The lender may even omit to describe some of the loan terms, leaving you with an incomplete picture of how this type of loan works. 

In some cases, the lender may offer what appears to be favorable terms with extremely low weekly or monthly payments for a while. However, these payments don’t even cover the interest.

What’s happening is that the extra interest is being added to the principal amount. Suddenly, you are facing a significant increase in payments you cannot afford or a giant balloon payment of more than you originally borrowed.

Then, to keep you returning and relying on the lender, you may receive an offer to roll over your existing balance into a new loan just before the final balloon payment. Of course, you receive new borrowing fees with this new loan.

Doing this just puts you on the hook for an even larger amount of money, creating a spiral you struggle to escape.

Most Common Types of Predatory Loans

A predatory loan can fit into several different categories. One of the best ways to protect yourself from predatory loan scams is to understand some of the most common ways they appear.

Regardless of what name they go by, they all make it extremely difficult for someone who is facing financial difficulties to complete the terms adequately.

Payday Loan

What Is It?: An easy-to-obtain loan that usually maxes out at $1,000 that the borrower must pay back quickly is a payday loan. This is the most common type of predatory loan. These loans are so dangerous that some states have relatively new laws that address the unfair aspects of payday loans.

Borrowers don’t need to go through a credit check to obtain the money, which makes payday loans appealing. You do need proof of a bank account and of having a job.

Ideally, the borrower can repay the loan after receiving the next paycheck from work. 

Why It’s Dangerous: Because of a short repayment period, one-time borrowing fees, and extremely high triple-digit interest, some people find they simply cannot make the payment on time. 

The lender may then offer to let you roll your balance into a new payday loan, but it comes with more add-on fees and a potentially higher interest rate. This creates a spiral you simply may not be able to overcome.

Some lenders include language in the legal paperwork associated with the payday loan that allows them to withdraw any missed payment amount from your bank account. You could rack up overdraft fees if you don’t have enough money.

Even worse, some payday loan providers are scammers in disguise. These lenders only offer you a payday loan because they are trying to gain access to your personal information and bank account information. They then may try to steal your identity.

How to Avoid It: The best advice is to avoid this type of loan if possible. 

Only use one if you have a financial emergency and know that your next paycheck will make it easy to cover this loan payment and all your other bills. Never put yourself in a situation where you might need to roll a payday loan into a new one.

If you must use a payday loan, ensure that any lender you select is legitimate. Rather than accepting a payday loan application from an online offer, know if the lender has a local presence in your city or state.

Some credit unions offer loans similar to payday loans with far lower interest rates. Or consider using a paycheck advance app with far better terms than a typical payday loan.

Vehicle Title Loan

What Is It?: This type of loan is similar to a payday loan in that it offers the borrower quick access to cash with a short repayment period. The two primary differences are that the vehicle title loan provides access to more money, and the borrower must use a vehicle title as collateral.

Why It’s Dangerous: If you cannot repay the loan on time, you could lose the title to your vehicle. If you rely on your vehicle to get to work, you suddenly could turn a bad financial situation into a dire one.

APRs are extremely high with vehicle title loans. Because of the short repayment time, it can be tough to repay the amount on time, especially since you can often borrow several thousand dollars.

How to Avoid It: If you have another, safer avenue to come up with the money you need, use it. You don’t want to risk ownership of your motor vehicle if you cannot repay the money. 

If you have a clean title on your car, you may be able to use it to gain a personal loan at a bank or credit union (just avoid banking scams), which will not charge you an excessive and unfair interest rate and will allow you to pay the money back over a longer period. 

Predatory Mortgage

Thoughtful couple writing in notebook while moving house

Photo by Ketut Subiyanto

What Is It?: When attempting to borrow money to buy a home and struggling to qualify for a traditional loan, you may often turn to a predatory mortgage lender (often without even realizing it)

The predatory mortgage loan may seem normal for several months’ payments. However, at some point, the payments may suddenly increase a lot, leaving you unable to meet them.

Why It’s Dangerous: A predatory mortgage loan charges extremely high-interest rates and unnecessary fees that can make it tough to repay the loan. 

It may involve a year or two of payments at a low initial interest rate. However, the lender rolls the true interest payments into your balance, preventing you from making progress.

When the introductory rate ends, you suddenly see your monthly payment increase significantly, leaving you struggling to make the payments. You also may be facing a balloon payment after a certain period that’s significantly higher than a monthly payment.

If you cannot pay, you could lose the title to your home. The lender gets all the money you paid over the first few years of the loan and the deed to the home. You’re left with nothing.

How to Avoid It: If you are preparing to buy a home, pre-qualify for your loan. Through the pre-qualification process, you may find that you must wait to buy a house until you have a larger amount available for a down payment. You then would have a chance to use a traditional mortgage provider.

You can qualify for a safer government-based mortgage loan. Check into this possibility instead of accepting a loan where the terms may leave you unable to afford the payments after a few years.

Additionally, speak to a few different borrowers to learn about your options. If one lender offers terms that seem too good to be true and vastly different from other lenders, the terms are probably tied to a predatory mortgage. 

Watch out for a process called steering, where a predatory mortgage lender tries to steer you toward a predatory loan, even though you qualify for a loan with far better terms. Seeking loan terms from multiple lenders can help you avoid steering.

Buy Now, Pay Later

What Is It?: If you don’t have the money to purchase appliances or furniture, you may turn to a buy now, pay later loan.

This is a potentially predatory loan that furniture stores or online sellers primarily offer. You would receive the money you need without payment for the first 30 days or longer. The lender then would spread the remaining payments over a set period, often without interest.

Why It’s Dangerous: As long as you make the payments on time, there is no problem. However, if you ever miss a payment, even by a day, the lender suddenly can hit you with significant fees and charge you interest back to the time of the purchase at a high rate.

These fees and interest payments can leave you unable to afford the appliance. 

People may not understand the full terms of these loans, as salespeople often offer them with slick marketing materials attached rather than explaining the details.

How to Avoid It: If you can pay cash for your items, do it. If you choose to use the buy now, pay later loan, just ensure you always make your payments early. Giving the lender the ability to pull payments directly from your bank account may be the best way to avoid missing a payment.

Steps You Can Take to Avoid Predatory Lending Practices

Steps You Can Take to Avoid Predatory Lending Practices

Photo by Mikhail Nilov

You can protect yourself from predatory lenders by following a few key steps.

  • Research: Take time to apply for the money you want to borrow from multiple lenders. If one lender’s terms are far better than the norm, this is a potential sign of a predatory loan.
  • Read Reviews: Check out the lender’s reputation online. If you see many negative reviews – or, even worse, no reviews – you may be experiencing a predatory lending practice or a lending scammer.
  • Check with the BBB: Your local Better Business Bureau may have negative reports on the lender you are considering. Check with the BBB for the latest information on the lender.
  • Read the Agreement: Do not sign any loan papers until you’ve read the legal agreement and fully understand it. Don’t just take a salesperson’s word about what’s in the agreement. Don’t sign if you cannot easily find the interest rate or repayment terms in the agreement.
  • Don’t Give in to Pressure: If a lender aggressively pushes the loan and tries to force you to sign the agreement without fully reading it, don’t. Legitimate lenders will not use these tactics.
  • Consider Bankruptcy: If you are in a serious financial situation, using a predatory lender will often dig the hole deeper. At least consider contacting a bankruptcy lawyer or a financial advisor for some help. These pros may have potential solutions beyond filing for bankruptcy.

Know the above and what to do if you get scammed, and you’ll be much safer.

Predatory Loans and Potential Identity Theft

Although predatory loans are bad enough for most borrowers, scammers are also out there. They may offer to allow you to apply for a payday loan or a similar type of loan, all with the idea of stealing your identity.

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You may never receive any money if you sign up for one of these loans. The lender simply wants your personally identifying information to use or sell on the dark web.

For example, with most predatory or payday loans, you must provide important personal information, such as your Social Security Number. If a scammer pairs this number with just some other personal information, you may become the victim of identity fraud.

Some signs that the payday loan you are signing up for could be a scam instead include:

  • No Local Branch: If you’ve never heard of this particular lender or the lender has no local office, this could be a sign of a scam. These lenders often must register with your state before they can begin operations.
  • Poor Spelling: If emails and forms from the lender have multiple grammatical errors and typos, this almost certainly is a scam. Any lender, even a predatory lender, will ensure its legal and marketing documents are pristine.
  • Threats: If the lender tries to tell you that you must agree now or the loan offer will disappear, it is a scam (or loathsome business practice). 
  • Lower Rates: Payday loans always carry a high-interest rate. If you’ve researched these kinds of loans and suddenly receive an offer with an interest rate far lower than what other companies offer, this is almost certainly a scam.

Consider Protecting Yourself With Identity Theft Protection Services

If you believe you may have exposed your personal information to a predatory loan scammer, consider taking steps to protect yourself and your identity. 

You do not want an identity thief to significantly worsen your financial woes.

The best identity theft protection services, such as Aura, will monitor your credit report and personal information to protect you. 

If the service finds that your information is being used oddly somewhere on the Internet, it will send an alert. You then can take steps to try to protect yourself.

đź’Ż Act Now: Sign up for Aura today to get 70% off and a 14-day free trial. Aura can protect your identity from these scams, letting you live a more financially secure life.

Ultimately, the best choice is to avoid payday and predatory loans altogether. These loans are not going to treat you fairly. 

Understandably, you may find yourself in a spot where you must seek a quick solution to a tough financial situation. If so, protect your identity and verify that the lender is legitimate. Read everything thoroughly before you sign it to ensure you understand the terms.

Other Types of Scams You Need To Know: