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Predatory lending is when a lender uses unfair or illegal tactics to convince someone to take out a loan. They typically want to convince the borrower to take out a loan because they will receive a commission at the expense of the borrower. If the lender benefits more than the borrower then this could be considered predatory.

Predatory lending is most prevalent in low-income areas and when lending to people with bad credit ratings. However – anyone can fall victim to this and so it is good to be aware of what constitutes predatory lending.


What Are The Key Points About Predatory Lending?

  • Predatory lending always involves unfair terms and conditions that benefit the lender over the borrower.
  • Warning signs include incredibly high-interest rates, additional paid services and paperwork that has time pressures (sign now or you won’t get your loan!)
  • Before you take out a loan or any financial product you want to make sure that the lender is regulated and trustworthy. If you look at the OLA website or the SEC you can find out if your lender is registered.


What Is A Predatory Loan?

A predatory lending loan is a loan that is offered by a lender that has unfair or outrageous terms attached to it. They typically target lower-income demographics and those with very bad credit – those who can least afford to pay back unfair lending terms. Before you take out a payday loan it is important to understand predatory lending so that you can avoid it if you do decide to take out a loan.

Predatory lending will typically use shady and exploitative tactics to encourage the borrower to take out a loan even if the terms of the loan are not beneficial to them. They might not even need the loan or be able to afford it. Any pressure selling tactics are typically considered predatory.

The bottom line is if the loan benefits the lender significantly more than the borrower then this could be considered predatory.


Lenders might use unfair terms and conditions to force you into taking out an expensive loan.

How Do Predatory Loan Companies Exploit The Borrowers?

Predatory lending can easily be identified but you need to know what you are looking out for. There are many red flags that mean you can spot predatory or unfair lending. You should look out for the following:

  • Incredibly high interest rates (high APR)
  • Extra services that you wouldn’t typically think you would need to pay for. That benefit the lender
  • Rushed or pressured paperwork
  • Unnecessary fees if you have a bad or no credit score

If you keep an eye out for these criteria then you’ll be on your way to spotting predatory lending.


What Are The Main Warning Signs For Predatory Lending?

You Can’t Find The APR

Another flag for predatory lending is if you can’t find out what the Annual Percentage Rate (APR) is. If you are working with a lender that is regulated and is looking after its customers then you should easily be able to tell how much the loan will be. They will clearly state how much money you will have to repay and by when.

If you are on a lender’s website and you cannot easily tell how much the loan will cost you then this is a major red flag. You should be able to tell all of the costs involved to you.

As stated by law a lender has to tell you all the costs and terms associated with the loan. They must let you know what the APR is and they have to let you know how much the loan will cost you in total when you repay it. If you cannot find this basic information then I would avoid this company.

The Loan Seems Way Too Good

As with anything in life – if it seems too good to be true then it probably is. Typical advertisements might say that they can help fix your low credit score, pay back money for less than you owe, and give you incredibly cheap loans even if you have a poor credit history.

Look closely before you sign any type of agreement. There could be a price for getting a payday loan fast and this could be getting into further debt or even damaging your credit score if you can’t afford to pay back your installments.


Be careful – before you accept money from a payday lender you should make sure the terms and conditions do not favor the lender.

Approval Seems Easier Than It Should

If a borrower does not do a credit check they have no idea of how you have handled debt repayments in the past. If they don’t know this then they might make up for it by charging extremely high interest rates to make up for the risk they are taking. If the APR is over 100% then this might be the case.

If you have high rates and fees upfront this is a major warning sign for predatory lending. Consumer advocate groups will let borrowers know that these are lenders to be avoided.


Is There Any Easy Way To Tell If A Lender Is Legitimate?

To make sure a lender is above board then you can work down this simple checklist below:

  1. Read the terms and conditions carefully – does anything jump out at you?
  2. Make sure their website is secure by looking for the https before the URL
  3. Do they have a registered phone number and email so that you can get in touch with them?
  4. Are they regulated
  5. Do they have online reviews that show they are trustworthy?

Borrowing money fast can be stressful – especially if you need it right now. Make sure that you use someone that is regulated and legitimate so that you don’t have added pressure on top of what is already a distressing situation.

Richard Allan

Richard Allan

Richard Allan is the founder of Capital Bean and a passionate writer about personal finance, budgeting and how to save money at home and work.

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