5 signs that an online loan is a debt trap
When you browse the crowded pages of Google search results for a online loanIt can be difficult to decipher reputable predator lenders.
These lenders, who resort to abusive or unfair practices, offer loans at high rates and excessively long or short repayment terms that make money for the lender but leave the borrower with a loan that he or she cannot afford. be not refund.
Payday loans are a common type of predatory loan: about 12 million Americans take them out each year, says Alex Horowitz, senior researcher at the nonprofit public interest group Pew Charitable Trusts. These short-term, high-interest loans can trap borrowers in a cycle of debt.
“Consumers do best when they have affordable payments, when they have a clear way to get out of debt,” he says.
Knowing what makes a loan unsafe can keep borrowers from falling into the debt trap. Here are five signs of a predatory loan.
1. Ads without credit check
Some lenders advertise loans that don’t require a credit check, which means that the lender does not get information about the borrower’s financial history and cannot assess his ability to repay the loan.
Predatory lenders will often charge a much higher price annual percentage rate to compensate borrowers who inevitably default on their loan, says Brad Kingsley, a South Carolina-based financial planner at Cast Financial.
“If they make it super easy [to get a loan], so it’s a red flag, ”he said. “Some setbacks are positive.”
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2. Focus on monthly payments
Lenders who advertise low monthly payments on a loan without mentioning the APR or the length of the loan should sound an alarm, Kingsley says.
Lenders can do this to distract from the length and rates of the loan, he says.
Since predatory lenders offer loans with high fees and high interest rates, borrowers need to focus as much on the total cost of the loan – which is an APR – as they are on the monthly payments.
3. Dizzying rates
The APR on a loan should not exceed 36%, says Charla Rios, a researcher at the Center For Responsible Lending, a consumer advocacy group.
This maximum rate has been confirmed by several states and federal agencies because it gives borrowers a fair chance of repayment and prompts lenders to offer affordable loans, according to a 2013 report from the National Consumer Law Center, a non-profit organization. policy-oriented that serves low-income people.
Many payday lenders charge well above 100% APRs and may not explicitly state this on their homepage, Rios says.
If you don’t see any APR ranges on the lender’s website, you need to be careful when dealing with them, says Lauren Saunders, associate director of the National Consumer Law Center.
“If you have to hunt [the APR], it’s a red flag, ”she said.
4. Repayment terms too long or too short
Payday lenders typically require the borrower to repay the loan within a week or two.
But some lenders offer small loans with high APRs and excessively long repayment periods, says Horowitz. These loans can let a borrower pay more fees and interest than the amount they originally took out.
For example, a $ 1,200 loan with an 18 month repayment period and 300% APR would result in monthly payments of approximately $ 305 and total interest of $ 4,299.
5. All-in-one payment requirements
A predatory lender may have repayment terms that require a one-time payment or a handful of small payments and then a lump sum, also known as lump sum payments.
The average payday loan takes 36% of a borrower’s salary, says Horowitz. If a borrower cannot do without this income, they can take out another payday loan to offset the cost.
A reasonable loan repayment plan should focus on a consistent portion of each paycheck, rather than a lump sum payment, he says.
Getting out of an abusive loan
Borrowers who have a predatory loan can try a few avenues to improve their financial situation.
Refinance the loan
If borrowers have strong enough credit, Kingsley says, they may be able to repay one predatory loan with another loan from a reputable lender. A lot credit unions offer low rates to borrowers with unwanted credit.
Request free advice
Contact your attorney general
Writing to your attorney general won’t take you out of the loan, but it will create a record that you have faced predatory lending practices, says Rios of the Center for Responsible Lending. If you are one of the many complainants, the office may investigate further.