Financial Literacy: Predatory Lending, Check Cashing Storefronts, Payday Loans

Predatory Lending

What is a predator? In nature, it is an animal that preys on other animals. One of the fiercest land predators in nature is the polar bear – it’s massive (grows to over 8 feet tall) and easily captures and eats it’s smaller, weaker prey.
Unfortunately, the term also means a person or a group that ruthlessly exploit (or takes unfair advantage of) other people – physically, mentally, or financially – sometimes all three.

When we talk about Predatory Lending, we’re referring to people who take advantage of desperate individuals, and lend funds knowing that it’s likely the individual will not be able to pay the loan back on time, and will have to renew the loan or get another one to pay off the first one. They charge high initial fees, high late fees, high renewal fees, which can result in repossession of loan collateral (like a car or appliances) or even the loss of a home.

Until the 1980’s, desperate people who needed money but couldn’t borrow it from banks or credit unions, would borrow from Loan Sharks, who were often association with organized crime. If they couldn’t pay the money back, they were threatened with bodily injury. The interest rates could be as high as 100% and higher if the borrower didn’t pay back the money on time.
Now the term Loan Shark can be used to describe store front payday loan and title loan businesses, who legally do the same thing (without threatening physical harm) and charge as much as 400%.

Predatory Lending
Payday Lending

If they are so bad, why aren’t the predatory lending practices illegal?  Payday loan and car title loan services are expected to earn $19.1 billion dollars in the U.S. in 2022.  This is big business that spends millions of dollars on political donations, campaign contribution, and lobbying, to defeat unfavorable legislation.  However, in the last 5 years, 15 states have enacted laws to prohibit excessive fees.  Ohio passed legislation mandating a maximum rate of 28%.

But these are not the only type of loans that can be considered predatory.  During our last recession in 2008, the value of homes was inflated, people were encouraged to lie about their income, and loans were issued to individuals that did not qualify for them.   Some of these same issues exist today.

But these are not the only type of loans that can be considered predatory. During our last recession in 2008, the value of homes was inflated, people were encouraged to lie about their income, and loans were issued to individuals that did not qualify for them. Some of these same issues exist today.

These are a few signs to recognize a predatory lender?  They:

  • Charge rates much higher than the standard rate for the type of loan you need – if you’re in Ohio and it exceeds 28% – walk away
  • Charge High origination fees (points) and other costs — check out other lenders
  • Suggest you lie about your income when applying for the loan, you don’t want to be involved
  • Advertise a lower rate loan, complete your paperwork and then tell you that you don’t qualify, and suggest a higher cost loan (bait and switch)
  • Rushing you through the paperwork, without explaining all the terms, or giving you time to “read the fine print” is definitely a warning sign something may be wrong. NEVER SIGN BLANK DOCUMENTS that will be filled in later.
  • Giving you a loan without checking your credit score, usually means they know you can’t afford to pay back the loan and will have to renew or get another loan, or will repossess your car or home
  • Require permission to electronically deposit the funds into your checking or savings account. An unscrupulous lender can then withdraw the payment from your account automatically, regardless of whether you need that money for food or rent.
  • They have big splashy ads featuring “fast” or “easy” money with “poor” credit.

There’s a reason Predatory Lenders exist and flourish.  Where else can someone with poor credit or income, or who’s fallen on hard times, get a loan?  There are some alternatives.

  • Join a federal credit union. You may be able to qualify for a short term loan.  The rate will be capped, for example 28% in Ohio, but the terms for repayment can be up to a year, instead of 2 weeks or a month.
  • Installment or short term loans. More financial institutions are specializing in loans for people with poor credit or no credit history.
  • Credit cards. Although we suggest you use your credit card only for items you’ve budgeted and only when you know you can pay it off within 30 days, this is a better alternative than a payday loan.
  • Family or friends. If this is your only alternative, be sure to write out an agreement specifying the terms under which you will pay it back, and then do everything you can to abide by those terms.
  • Start saving money now for “emergencies.” We all have them some time in our lives. Planning ahead is the best alternative.
This is a good video to end with– 2 examples