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As the name suggests, predatory lenders prey on susceptible borrowers. The specifics of the loan might be technically legal, but predatory lenders offer vulnerable people access to funding at exorbitant rates. 

It may be hard to leave the vicious cycle of debt after predatory lenders trap you in a loan. 

What is predatory lending?

Predatory lending is exactly what it sounds like. Unscrupulous lenders use unethical tactics to entice and mislead vulnerable borrowers into taking out a loan that will often cause financial damage to the borrower. Specifically, borrowers are frequently unable to reasonably repay the loan or must pay back the loan at an extremely high interest rate. 

In many cases, predatory lenders take advantage of a borrower's strained financial situation or lack of financial acumen. When the right pressure is applied, many unsuspecting borrowers get pushed into taking out a loan that will likely cause long-term damage to their financial situation. 

In contrast, regular lending includes loans from reputable companies that offer reasonable interest rates on the funds a borrower needs to accomplish a specific financial goal. For example, personal loans, auto loans, and student loans from reputable lenders fall into the category of regular lending. Although you'll have to repay all loans with interest, a regular loan shouldn't derail your financial stability.

It's clear that you don't want to get yourself into a predatory loan situation. When evaluating loan options, keep the following tips in mind to avoid getting trapped in a predatory loan: 

1. High or undisclosed interest rates.

The first red flag of a predatory lender is high or undisclosed interest rates. Most of the best personal loan lenders charge interest rates below 36%, and many offer interest rates far less than 36%. 

In contrast, predatory lenders often charge sky-high interest rates. 

"Predatory lenders often charge interest rates significantly higher than the national average," says Andrew Lokenauth, founder of Fluent in Finance and professor at the University of San Francisco. 

It's not uncommon to see predatory lenders that offer interest rates as high as 400%. 

2. Excessive fees. 

On top of high interest rates, many predatory lenders pile a litany of excessive fees onto your loan. For example, predatory lenders might charge prepayment penalties, which aren't a common fee for most loans. 

Typically, you'll have to dig deep into the fine print to uncover these excessive fees. In some cases, these hidden fees will not be included in the loan's APR. 

The only way to find these excessive fees is to read the fine print. 

3. No credit check.

Most reputable lenders require a credit check before sending you money, as the lender wants to ensure that you are likely to repay the funds in a timely manner. 

In rare cases, a reputable lender will finalize your loan without a credit check. But it's very common for predatory lenders to offer you a loan, regardless of your credit score. 

"This can mean that they're not concerned about your ability to repay the loan," Lokenauth says.

4. Short repayment terms.

When taking out a loan, you need a reasonable amount of time to pay it back. If the repayment timeline is too short, the loan will likely put a significant crunch on your financial situation. With that in mind, most reputable lenders offer repayment terms of six months to several years. 

In contrast, predatory lenders often offer repayment terms of a few short weeks. Typically, predatory lenders are less concerned with the stability of your financial situation. Instead, many predatory lenders will apply pressure to recoup their funds. 

5. Unnecessary add-ons. 

Loan products can be complex. But many borrowers don't need the extra add-ons that a predatory lender will throw into the loan terms. Typically, these add-ons involve extra costs with minimal financial benefit. 

6. High pressure sales tactics.

"Predatory lenders often use high-pressure sales tactics to push borrowers into signing up for loans," says Gabriel Lalonde, CFP and President of MDL Financial Group. 

"They may use scare tactics or offer quick cash without giving you enough time to review the loan agreement," Lalonde says. "Avoid lenders who pressure you into signing up for loans, and take the time to review the loan agreement carefully."

How to avoid predatory lending

A predatory loan can have devastating consequences for your finances. When looking for a loan, do your research to ensure you only borrow from reputable lenders. Read reviews of companies before borrowing to confirm they are legitimate. 

"Trust your instincts when dealing with lenders," Lalonde says. "If something sounds too good to be true or feels wrong, it probably is. Do not be afraid to walk away from lenders who you do not trust or who offer loans with unfavorable terms"

Next Step: See if you're prequalified for a loan without impacting your credit score.

What to do if you've been a victim of predatory lending

Predatory lenders are good at their jobs. Many unsuspecting people have become the victim of a predatory lender. If you are already caught in the crosshairs of a predatory lender, act quickly to remove yourself from the situation. 

Getting out of debt isn't always easy. If possible, start by consolidating your predatory loans into a new personal loan with a lower interest rate. From there, work to pay off your debt by slashing expenses and picking up extra income. 

Never be afraid to ask for a helping hand from family and friends. Do anything you can to get out of the clutches of a predatory lender before things go from bad to worse. Finally, consider reporting the predatory lender to the Consumer Finance Protection Bureau.

Frequently Asked Questions

What are some things you might do to avoid a predatory lender? Chevron icon It indicates an expandable section or menu, or sometimes previous / next navigation options.

As you shop for a new loan, avoid working with lenders that charge extremely high interest rates. Avoid anything that sounds too good to be true. Always do your research about a particular company to ensure you don't get stuck with the wrong lender. 

What is a red flag for predatory lending? Chevron icon It indicates an expandable section or menu, or sometimes previous / next navigation options.

One red flag of predatory lending is sky-high interest rates, or undisclosed interest rates. Also, a hard sales pitch encouraging you to take out a loan is usually another red flag. 

What are the most common predatory loans? Chevron icon It indicates an expandable section or menu, or sometimes previous / next navigation options.

Payday loans are one of the most common forms of predatory lending. Short repayment timelines and extremely high interest rates spell trouble.
Sarah Sharkey
Sarah Sharkey is a personal finance writer who enjoys helping people make better financial decisions. Sarah enjoys traveling, hiking and reading when she is not writing. You can connect with her on her blog Adventurous Adulting.

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