How to spot predatory lending — and what to do if you’re stuck

You’ve probably seen ads for loans that seem like quick, easy solutions to money problems. Payday loans and car title loans are common examples. These types of loans may be considered predatory if they come with high interest rates and fees hidden in the fine print. Sometimes the loans are presented in intentionally deceptive ways. They tend to target people who feel they have no other options and trap them in costly cycles.

If you have experience with costly loans — or if you need help getting out of one right now — you’re not alone. Every year, roughly 12 million people take out payday loans and similar lines of credit. But there are things you can do today to break free from high-risk lending cycles.

Let’s dive in so you can learn to recognize these loans, break free from their cycles, and make safer choices that fit your situation and needs.

What are predatory loans, and how do they hurt your finances?

Predatory lending happens when a lender offers a loan with misleading terms or unfair practices meant to trap borrowers in a long cycle of debt.

Predatory loans often have hidden fees and high interest rates that make them difficult to pay off. This could force a consumer to borrow repeatedly, tacking on more debt. Eventually, this can hurt credit scores, result in bank overdraft fees, and even cause borrowers to lose their cars or homes.

A payday loan is one common example of a high-cost loan that can create a risky financial scenario. These are typically small, short-term loans with high interest rates and fees. The loan payment is usually due on your next payday and automatically withdrawn from your bank account, which could lead to overdraft fees if you aren’t prepared to pay the full amount. This could also impact your credit score and lead to debt collection issues.

Other types of high-cost loans can include:

• Car title loans. These are short-term loans that let you borrow against your car’s value. This isn’t always bad, but you risk losing your car if you can’t repay, and interest rates are typically high.
• Refund anticipation loans. These short-term loans offer an advance on an upcoming tax refund, but they often come with high fees and interest rates.
• No-credit or bad-credit loans. If a lender offers a “no credit check” or “guaranteed approval” loan, they’ll probably charge a high interest rate and fees to compensate for the risk. For example, a car dealership might offer this type of loan to customers with lower credit scores.

Warning signs of risky lending

Predatory loans come in many forms, but recognizing these red flags early can help you stay in charge of your borrowing options. When comparing loan options, look out for these common warning signs:

• High interest rates and fees. Some loans charge nearly 400% in interest and fees, whereas a credit card charges an average of 12% to 30%. If a loan’s cost seems too high, take a moment to compare it to other lending options.
• Renewal or rollovers. A lender might offer an option to “renew” or “roll over” your short-term loan, where you pay a fee to extend your due date. Then you still owe the original principal amount plus even more fees and interest. Before borrowing, consider whether you reasonably expect to be able to repay on time to avoid additional costs.
• No income verification. Lenders that don’t verify your ability to repay may not be lending responsibly. Protect your finances by choosing lenders that are invested in whether you can manage your monthly payments.
• Balloon payments. Loans may offer low payments in the beginning but raise them over time or without warning. When applying for a loan, confirm that your monthly payments will be fixed so that there are no surprises.

Safer alternatives to risky loans

Predatory lenders often seek out people who feel like they’re out of options. But safer alternatives likely exist. If you feel like you’re in an urgent situation, pause, reflect on your financial need, and consider these options for borrowing on your terms:

• Talk to your bank or credit union. It might offer small personal loans at a lower cost than other lenders.
• Community assistance. Local organizations may offer low-cost loans or other forms of financial help. Call 211 or visit 211.org for local referrals.
• Employer paycheck advance. Your employer may be willing to give you early access to your upcoming paycheck, without interest or fees.
• Help from family or friends. People you know may be willing to lend you money with agreed-upon repayment terms.
• Talk to your existing creditors. If you’re seeking a new loan to pay off an existing one, try this instead: Call the existing creditor to see if you can negotiate a different payment plan. Many lenders will work with you to find a solution.

How to break the predatory lending cycle

If you’re currently stuck in a predatory or high-cost loan, know that many people have been there before and found a way out. Here are some steps that may help you find a comfortable path forward:

• Avoid refinancing, renewing, or rolling over the high-cost loan, as this will only add more fees. Focus on repaying it without incurring further debt.
• Pay more than the minimum payment if you’re comfortably able to.
• Get help from a credit counselor or financial coach to come up with a debt management plan. The National Foundation for Credit Counseling is a place to start.
• Consider applying for a personal loan from a bank or credit union with a lower interest rate to pay off the predatory loan in full.
• Work on building your credit so you have more options in the future. A credit-builder loan is one option to consider. These small loans, offered by nonprofits and some banks and credit unions, help borrowers build or repair credit as they pay.