What Is Predatory Lending?

Understanding predatory lending

Predatory lending refers to practices that take advantage of borrowers and cause them financial harm. This can include extremely high interest rates, short loan terms that are difficult to stick to, massive penalties for late payments and even liens on borrower assets.

Lenders that engage in predatory tactics often target borrowers who don’t have the means to repay the money being borrowed. This includes cash-strapped individuals, those with low income or poor credit, and members of historically underserved communities. These loans are often structured to be hard to pay off, giving lenders the chance to garnish wages or repossess high-value assets like cars or houses.

Predatory lenders often emphasize the fast cash or flexibility of a short-term loan but gloss over key details, like hidden fees, high interest and the real cost of missing a payment.

» MORE: Signs of personal loan scams

Common predatory lending practices

Common predatory lending practices typically begin with promises of access to fast cash, even if you have poor credit. Predatory lenders use aggressive sales tactics to pressure you into taking out a loan, then rely on threatening collection practices if you struggle to repay.

Here are a few ways that lenders can exploit borrowers through unfair loan practices:

Asset-based lending

Asset-based loans require you to put up valuable items called collateral to secure the loan. This can be predatory if the lender takes advantage of your urgent need for cash.

Pawn shops are a common example. They hold your collateral in exchange for a short-term loan, and if you don’t repay, they keep and sell your item. These loans often come with high interest rates (sometimes over 100%) and very short repayment windows, making it difficult to pay them off in time.

Loan flipping

Another tactic of predatory lenders is loan flipping. When a lender continually refinances your loan, promising better rates or terms that minimally affect your actual payment, you can end up owing a huge amount in fees.

Every time the loan is refinanced, you pay origination fees or possibly extend your loan terms. This means you’ll ultimately pay more over the life of the loan.

Hidden fees

Lenders may add fees that aren’t included in the monthly payment but still drive up the total cost of the loan. High origination fees, prepayment penalties and late-payment fees can make it harder for borrowers to pay off the loan in full.

Bank account withdrawals

Some lenders will require direct access to your bank account, allowing them to withdraw funds to collect on the loan. Lenders may overdraw your account or potentially withdraw more than agreed-upon if they have full access to your accounts.

» FIND OUT: Can I get a legit loan with bad credit?

Common predatory loans

The repayment terms on many predatory loans are short and aggressive. Lenders may also use high-pressure sales tactics to get borrowers to agree to terms they don’t fully understand.

The following loan types are frequently used in predatory lending schemes:

Payday loans

Payday loans may be the most common predatory loans. Payday lenders offer immediate cash to help borrowers cover bills or rent with interest rates above 300%, making it much more expensive for borrowers to repay the loan.

If the payday loan isn’t paid off in time, lenders can charge even higher penalties and interest, and potentially sue the borrower to garnish their wages.

Car title loans

Car title loans can also be predatory, with lenders often targeting low-income individuals who may not have the means to repay. With a car title loan, you’re required to pledge your vehicle as collateral to borrow the money, and if you fail to repay your loan on time, the lender can repossess your vehicle and sell it.

Merchant cash advances

Merchant cash advances (MCAs) target business owners and self-employed individuals who may not qualify for traditional financing. MCA lenders offer a lump sum in exchange for a portion of your future revenue. These advances often come with very high effective interest rates and steep fees.

If you can’t repay on time, some lenders may offer to extend the terms — often with even higher costs attached.

How to spot predatory lending

To spot a predatory lending situation, it’s important to educate yourself on how certain types of loans work. In general, if the loan advertising includes “no credit needed” or “no cash, no problem,” you should be wary of the lender.

Look out for red flag phrases

These phrases sometimes signal predatory lending practices:

• “No credit? No problem!”
• “Guaranteed approval.”
• “Instant cash now!”
• “Bad credit accepted.”
• “Get money today — no questions asked.”
• “Why wait for payday?”

Predatory lenders target people who either don’t understand how short-term loans work or are in such a tough financial spot that they feel forced to accept unfair terms.

“The easiest way to avoid predatory lending is to borrow only from lenders that you know are fair and reasonable,” said Joseph Di Gangi, a certified financial planner in Easton, Pennsylvania. “If the first time you hear from them is when they call you on the phone to offer a loan, there's a good chance you should work with someone else. If they don't want to check your credit, that's a sign that they may be looking to take advantage of you.”

If you ask about fees, interest or penalties and the lender is vague, dismissive or avoids your questions, that’s a red flag.

To avoid potentially shady lenders, it’s a good idea to shop around. Consider getting a loan from a bank, credit union or reputable online lender that offers transparent fees.

Legal protections and resources

If you suspect a lender is engaging in predatory practices, you can report them to the Consumer Financial Protection Bureau (CFPB). Just fill out a complaint form. The CFPB will investigate and may issue penalties or help you seek restitution.

You can also file a police report with your local department or contact your state attorney general. This may open a criminal case and strengthen your claim for restitution.

If you sign up for a loan that has left you overwhelmed with debt, a credit counseling agency may be able to help. The National Foundation for Credit Counseling is a nonprofit that can help you create a debt management plan and negotiate lower payments.

Additional resources:

• The CFPB offers guides on payday loans and how to spot harmful lending practices.
• The U.S. Department of Housing and Urban Development (HUD) provides resources for identifying and reporting loan fraud.

Alternatives to predatory loans

The following alternatives can help you avoid predatory lenders:

• Banks or credit unions: Unlike payday lenders and other high-risk lenders, banks and credit unions are heavily regulated and usually offer personal loans, car loans and mortgages with reasonable rates and fees.
• Credit counseling: If you’re stuck in debt and considering a payday loan or car title loan to help make your payments, you might just need the help of a credit counselor instead. Credit counselors are nonprofit organizations that help you create a debt management plan, lowering your monthly payments and negotiating with your creditors.
• Peer-to-peer lending: If you don’t have the best credit, a peer-to-peer loan or microloan may be a good option. You can borrow directly from individual lenders and get a reasonable rate without hidden fees.
• Cash advance apps: While payday loans are generally bad, some cash advance apps will lend you up to $500 with minimal interest and fees before your next paycheck.

» COMPARE: Top customer-reviewed bad-credit lenders

FAQ