Regardless of your credit there are companies that will offer you lending options. Lenders focus on profitability, over your personal financial wellbeing. When you face credit challenges, the number of lending offers that are predatory increase dramatically.
What is Predatory Lending?
Predatory Lending is any practice that uses deceptive advertising or unfair terms can be considered predatory. Aggressive sales practices and terms that work against you are common themes among predatory loans.
Credit lenders rate customers based on risk of repayment. If the company feels you will most likely repay the loan on time, then you receive better rates than if the lender feels you have a high risk of non-payment.
Banks determine risk your level by how you’ve made payments in the past, your income level compared to debt, and your job and housing stability. Those who get low risk ratings are considered prime customers. They will be offered the lowest rates and best terms. When you see an advertisement stating “rates starting at…” the low rate listed is reserved for prime customers.
Subprime lending has its own billion-dollar industry. These companies specialize in lending money to those who have poor credit histories or have struggled financially in the past. Subprime customers have lower credit scores, higher debt leverages and more difficulty proving income. In exchange for the higher risk, interest rates and fees are also higher.
Credit card companies might offer a subprime customer a credit card but it will have a low credit line and typically an interest rate of 20% or more. Prime customers will be offered higher credit limits and rates often in the single digits.
Car loan companies may offer subprime customers loans but require higher down payments and interest rates in the 20% and above even though it is secured by a vehicle. They are less likely to waive late fees and more aggressive with collections and repossessions. These practices can result in even worse credit for those who are already struggling with debt issues.
Predatory Practices, What to Avoid
Balloon Payments offer small initial payments, sometimes interest only, which can be enticing at first when you are struggling. The challenge comes when the loan comes due and balloons, meaning the full payment is required. Most who accept balloon payments hope to refinance before the balloon comes due. If that fails you could lose your home.
Presenting Add-Ons as Required. Ask specifically what add-ons are required and what are optional. It is common to present “option services” as required when they are not. Add-on products and services generally add little value and have high profit margins for the company.
Prepayment Penalties. As you make on time payments, your credit is likely to improve but prepayment penalties can prevent you from getting out of the high interest rate loan without paying a high penalty.
Higher fees and interest rates are expected with any subprime loan. High upfront fees could prevent refinancing because of the higher loan balance. Short term loans like payday loans are notorious for charging the equivalent of 300% of more in interest equivalent fees. Pay attention to all loan costs and review the necessity of the loan before signing.
Companies who promote easy money for those with poor credit are profitable by using aggressive lending tactics, high fees and interest rates. They will experience a higher default rate, leaving those who do pay back the loan making up for others who default. Generally, it is not a good idea to support such lending practices as you end up suffering financially at a time when you can least afford it.