At some point in our lives most of us have contemplated or been offered a predatory loan or credit facility. They are usually packaged as ways to get money fast, with little to no vetting in terms of credit history or character. A plethora of companies have sprouted up to quench our society’s insatiable thirst for money on demand. Here are some sure-fire signs that you have signed on with a shark lender:
You’ve been pre-approved without any prior dealings with the company.
If you have received a pre-approval offer in the mail or in your email inbox concerning a credit card or other lending facility, chances are it comes with hefty strings attached. Without actually knowing you, predatory lenders will automatically strap you with an exorbitantly high interest rate as a measure of the risk they take on by blanketing huge swaths of society with these pre-approval’s. As a finance industry veteran I was told that it takes about 5 new credit card approvals to make up for one single credit card default (the defaulting customer has no ability to repay their debt and thus they file for bankruptcy, consumer proposal, or simply disappear from the grid).
The lending office is next to a quick-service pizza place.
While this concept seems funny, it is true that a lot of these predatory lending joints are located in strip malls. In an effort to reduce costs, they simply won’t splurge capital on standalone branches like a bank will do. This is often times accompanied by only a few loan officers that do most of the work. The windows will often be adorned by signs or banners indicating an opportunity to secure funds with little hassle. They want to underscore the convenience of their service, while moving attention away from the true cost of taking out such a loan.
They just want to know if you have a job.
Traditional banks will typically pull your credit bureau and want to see at least 2 years worth of employment history before lending you certain amounts (typically over $2,500.00). Any blemishes or unpaid collections can scuttle a proposed lending agreement. With predatory lenders, they just want to know if you have recurring income and are not so much concerned about if you will repay (they factor in default rates and assign high interest rates accordingly).
The costs of borrowing are obfuscated (deliberately made vague or unclear).
This is really where a predatory lender shines. The legal interest rate limit on these types of loans are 59.9% here in Canada. This does not take into account compounding interest, however, a concept which tends to bewilder a lot of people. Basically, these loans are typically meant for about 2 weeks. Now, a lot of people cannot repay the loan back in that timeframe and so they take out another loan to cope with the initial debt. The interest compounds on interest and before a customer knows it, they are paying 400% on a $300.00 loan they took out a year ago. These are referred to as “never-never plans” by traditional banks, as the customer is locked into a debt spiral they cannot ultimately control.
To add to all of this: many of these c-lenders will tack on administration or other miscellaneous fees, making the costs of borrowing even greater. Yes, by law they must disclose these costs , but many desperate borrowers tend to look past the details as they have no other alternative. In this sense predatory lenders do serve a purpose in our society, albeit a very shady and tragic one.
Your vehicle payments is almost as much as a mortgage payment.
Not only relegated to small personal loans, predatory lending also has its tentacles firmly planted into automotive sales. Yes, while it is true many people need to get to work somehow, I’ve had countless discussions with people (during my tenure in retail finance) who called in to find out the balance remaining on their vehicle, only to learn that they still owe the lion share of the original financing amount and they’ve been essentially paying interest for the past 5 years. The fair market value of their vehicle at this point has depreciated (with age and mileage) into a negative equity situation, where their loan is a lot more than they would get on a trade-in or private sale.
This is because the dealership they went to sold them a vehicle involving either two sort of scenarios:
The first one. They signed on to buy a very expensively marked up vehicle with low monthly payments. While it is great that the payment is not biting into income that much every month, leaving more funds for other budgetary concerns, this also means the debt gets paid considerably slower. Leading to negative equity.
The second scenario. The interest and principal payment are high, but you believed you got a good deal on the final price. Dealers either make money upfront (on the asking price), or the back-end (the interest paid over the amortization of the loan). Just because you got the vehicle at a discount, does not mean the dealer didn’t account for that in the interest cost.
The final crescendo comes with upselling. 3M protection? Extended warranty? How about lifetime care packages? Remember, aside from the warranty, these items will provide little benefit when it comes time to sell or trade-in. While some may prove to be useful, they are really just trying to squeeze you for more money.
Ask family or friends for a loan, or start budgeting & saving.
While it is never fun to be turned down for financing at a traditional bank, they do this because they don’t want to necessarily saddle consumers with debt they cannot repay. Also, frankly, they are business made viable by prudent lending practices. Never take it personally if you get rejected for financing–often times they are doing you a favor. Instead, start looking at ways to improve your structural financial challenges and try your best to avoid the vicious debt cycle that forces many into insolvency in our society.
In Canada, over 8 million people have less-than-favorable credit scores, meaning they would likely be turned down for loans by a traditional bank. Elsewhere, like in the United States, you could imagine such a figure would be higher with a more pronounced income disparity. I want to stress, though, that predatory lending not only focuses on low-income individuals. It comes in many embodiments in our commercialized society. Read the fine print and do the math before making weighty financial decisions.