Dangerous Waters: Avoiding Loan Sharks
When it’s time to seek help with a loan it’s important to consider that the burden of potential debt can outweigh the benefits if you don’t choose carefully. Whether you’re in a tight spot financially or simply seeking a new start with a business venture or an important large purchase, the steps you take next can determine the quality of your future. Learn how to identify and avoid predatory loans for financial success.
What Is a Predatory Loan?
A predatory loan is any loan garnered by deception on the part of the lender. Due to its broad nature, there is no specific legal definition of a predatory loan and laws preventing these practices can vary from state to state which means that these practices are difficult to control. Your level of awareness is of the utmost importance. The dishonest purveyors of these loans are colloquially known as “loan sharks,” making their living from exorbitantly high interest rates and often, the forcible extraction of payment via blackmail, violence or simply lies about what is owed and when.
Spotting a Predatory Loan
The majority of unjust loans are accompanied by these shared traits:
- High interest rates. Interest rates vary depending on the health of your credit score, however researching the type of loan you are seeking will tell you what you might expect. Some predatory loans carry interest rates as high as 400%, an instant red flag.
- Refinancing. This is a blanket term that indicates the lender is going to switch your loan to a better or lower interest rate in the future, typically an empty promise that forces you to keep paying absurd amounts.
- Unusual monthly rates. With monthly payment rates that seem very low, predatory lenders may expect large sums at one time later. Monthly rates that are much too high for you to afford are also negative. Good lenders will either turn you away if they know you cannot afford their price, or negotiate to meet your income.
- Payday, Cash Advance, and Paycheck Loans. These are short-term emergency loans for small amounts based on the idea that you will repay them when your paycheck arrives, however the interest rates often far exceed the worth of lower class borrowers’ paychecks, trapping them in debt.
- “No Credit? No Problem,” “We Take Bad Credit,” etc. These flashy advertisements often mask a lurking loan shark.