What Is Predatory Lending? A Complete Guide

Loans play an increasingly important role in the modern economy, allowing people to purchase homes and cars, start new businesses, and go to school. While loans do offer a world of possibilities, not all loans are created equal, and not all lenders necessarily have your best interests in mind. Predatory lending practices are unfortunately more common than you realize. Learn more about predatory lending through our guide below.

Chapter 1

What is Predatory Lending?

Predatory lending generally refers to unfair lending practices that benefit the lender at the borrower’s overwhelming expense. This is accomplished through unfair and abusive loan terms. That can involve a variety of different methods and strategies, but most predatory lending practices typically uses a combination of:

Unfair lending practices that benefit the lender at the borrower’s expense.

High introductory fees

High interest rates

Removing equity from the borrower

Putting a borrower in a lower credit-rated loan

All of these unfair lending practices are designed to benefit the lender, which also often means over-aggressive sales tactics to force you into deals. This lending practice is often designed to take advantage of the average borrower’s lack of understanding of loans and financial transactions. Many completely resort to lying and deception, and in worst cases, predatory lenders will threaten violence or litigation against borrowers in order to collect debts.

Chapter 2

Who is at Risk of Predatory Lending?

While predatory lenders can target anyone, they most often go for more vulnerable populations, like:

The elderly

Consumers with less education

Low-income workers having trouble with their everyday finances

People who are denied access to other loans and forms of credit

People who have recently lost their jobs

People who need immediate cash for emergencies, like for hospital bills, car payments, and mortgage payments

There is thankfully a wide range of low-risk, affordable options for people who need money quickly, like the alternative payday loans available from Possible Finance. However, those who don’t know about alternative options can easily fall prey to predatory lending practices.

Chapter 3

What are the Warning Signs of Predatory Lending?

People who are desperate for money or simply don’t know better are easy targets for predatory lenders. Knowing what to look for and avoiding them can prevent you from falling victim to this kind of abusive lending practice. Here are some common warning signs for a predatory loan.

They Don’t Check Your Ability to Repay

Most legitimate lenders will look at your current income and check your credit before even offering a loan. If you are working with a reputable lender, they will not skip this step. This helps the lender assess how you have dealt with previous debts, your ability to repay future loans, and the potential impact of taking on more loans. A lender who does not, at the very least, consider your regular income likely does not care about your ability to repay.

If you are working with a reputable lender, they will not skip this step.

A reputable lender will likely take the extra step of making sure you can repay the loan while also affording your everyday expenses. In fact, Possible Finance makes this a requirement for its loans. Predatory lenders will not consider your ability to pay for food, rent, and bills.

They Only Require Electronic Payments

While plenty of modern transactions are done digitally, no lender should require electronic payments. More specifically, no lender can demand access to your bank account for payment collection. Many legitimate lenders may ask for access to allow for convenient automatic payments, but this is by no means the only option they will provide for receiving payments.

No lender can demand access to your bank account for payment collection.

Predatory lenders may use your bank account as their own personal ATM and make constant payment requests and withdrawals until your account is empty, at which point you may have to deal with an excess of overdraft fees.

Bad Reputation

Reputations can be hard to gauge, but before you ever sign a loan agreement, make sure you do some research on the lender. The Better Business Bureau frequently offers customer ratings and reviews, allowing you to see any potential complaints prior borrowers have made so you can avoid signing up for a predatory loan. The Federal Trade Commission also offers scam alerts, while the Consumer Financial Protection Bureau has a complaints database that allows you to look up lending companies by state.

Hidden Fees That Inflate APR

All lenders are legally required to state the APR (annual percentage rate) of the loan. This includes the full sum of the interest rate plus any upfront fees. Any fees that are hidden in the fine print will arbitrarily increase upfront costs and inflate the APR. Both of those components only make it harder for the borrower to repay the loan while adding significant costs upfront, easily trapping the borrower in a cycle of debt.

High-Interest Rates

All lenders depend on risk-based pricing, like basing interest rates on your credit history. However, even if you have bad credit, the interest rate on your loan should still be manageable given the repayment period. Predatory lenders will abuse this, charging interest rates in the triple digits to borrowers who are already at a high risk and more likely to default.

Add-on Loan Services

Predatory lenders are also more likely to add unnecessary services and products onto your loan as a means of making more money upfront. For example, it is not uncommon for predatory lenders to add on insurance to your loan amount. They can then add the insurance premiums to the loan amount, which then increases how much you pay in interest. The predatory lender earns commissions on these premiums or may ask for several years of premiums paid in advance.

Rushed Approval

Approval periods can take anywhere from a few days to a few weeks depending on the type of loan that you are applying for. Predatory lenders will try to rush you through the approval process, forcing you to sign paperwork before reading any of the loan term agreements. This allows them to get money more quickly into their pockets while preventing you from thinking too hard about the loan term agreements.

Loan Flipping

Loan flipping refers to a process wherein a lender coerces a borrower to refinance their loan again and again without ever benefitting from that refinancing. While that refinancing might initially appear to put money back into your bank account, the high interest rates, increased fees, and prepayment penalties of a refinanced loan render that extra money irrelevant. That puts more money in the lender’s pocket while trapping the borrower in constant debt burdens.

They’re Lying to You or Asking You to Lie

Predatory lenders will frequently misrepresent the terms of the loan or completely lie about those terms. That can be difficult to truly determine without reading every bit of your agreement, but be aware of language like:

Easy payment terms

Easy credit

No payments for 90 days

Alternately, a lender should not ask you to lie in order to push an approval. This is another way for lenders to rush the process and partake in unfair lending practices, but it can lead to severe legal problems later on. Do not lie about your income, credit, or any other aspect of your finances, even if your lender says that you can.

Do not lie about your income, credit, or any other aspect of your finances

Chapter 4

How to Spot a Good Lender

A good lender from a reputable financial institution will not pose any of the above warning signs, but simply put, a good lender will essentially be fair and transparent. A good lender:

Checks your credit

Checks your ability to repay the personal loan

Only lends you the amount that matches your financial need without trying to upsell you on unnecessary products or services

Clearly disclose the total cost and APR of your loan

WILL NOT ENCOURAGE ANY REPEAT BORROWING OR REFINANCING

Chapter 5

Alternatives to High-Cost Predatory Loans

The good news is that there are plenty of alternatives to predatory, high-cost loans that will not hurt you or force you into a cycle of debt.

Payday Alternative Loans

Traditional or instant payday loans have a high potential to be predatory because they often come with unnecessarily high interest rates and short repayment periods, but payday alternative loans (PALs) offer fairer terms with the same short turnaround time. Payday alternative loans from federal credit unions usually come with lower interest rates and longer repayment periods. Furthermore, while credit unions will not base your loan on your credit history, they will report repayments to the major credit bureaus, which can help borrowers improve their credit scores.


Related: How Can I Raise My Credit Score in 30 Days


Payday loans from Possible Finance are a similar alternative. Possible Finance’s payday loans offer quick approval with repayment installments over several months with rescheduling when necessary. Furthermore, Possible does not require good credit, but we do report repayments to the three credit bureaus, allowing you to build your credit.

Installment Loans for Bad Credit

Installment loans allow you to borrow all your loan money at once while repaying the loan in fixed monthly payments (installments). For borrowers with bad credit, lenders will look at your existing debt, your regular income, and your monthly transactions to determine your financial behavior and your qualifications.

Short-Term Bank Loans

Short-term bank loans refer to a wide range of loans. Payday loans are technically within the “short-term loan” umbrella, but short-term bank loans provide you with a loan that is designed to be repaid within one year. Short-term bank lenders will perform credit checks, look at your paystubs, and otherwise determine your financial history to determine your ability to repay. You may still have to deal with high interest rates, but short-term bank loans will generally be fairer and much more transparent about their terms.

Predatory lending is unfortunately an inherent part of the industry that likely is not going anywhere soon. However, being careful, knowing the right red flags, and being aware of other financing options can ensure that you don’t become a victim to predatory lenders. Possible Finance offers a great option for those looking for quick cash without the high risks, high costs, and potential abuse of predatory lending. To learn more about our alternative payday loans, contact Possible Finance today.

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