What Is Predatory Lending?

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What is predatory lending?
Signs of predatory lending
The loan seems too good to be true
The lender doesn’t disclose the annual percentage rate
It’s surprisingly easy to get approved
- Not ask for information about your existing debts and income.
- Push you to take a bigger loan amount than you asked for.
- Have balloon or lump-sum payments instead of fixed monthly payments.
- Encourage repeat borrowing or extending the loan.
You can’t build credit with the loan
The lender has a history of customer complaints
What is an example of predatory lending?
How to avoid predatory lenders
- Payday alternative loans: Payday alternative loans are offered by federal credit unions and have lower interest rates and longer repayment terms than payday loans. You do not need good credit to apply, but you will need to become a member of the credit union.
- Interest-free paycheck advances: Mobile cash advance apps allow users to access a portion of their paycheck before payday, which may be enough to cover an emergency expense. The apps usually request an optional tip and charge a fee to get your funds fast.
- Community organizations: Local nonprofits, religious groups and community organizations may provide funds for necessary expenses like rent, utilities and groceries. See NerdWallet’s database of financial assistance programs to learn what’s available in your state.
- Money from family or friends: A friend or relative may be able to loan you the funds in a pinch. Just make sure to use a family loan agreement to avoid any miscommunication.
- Personal loans: A personal installment loan from a credit union, bank or reputable online lender can offer larger loans, lower APRs and longer repayment terms than a payday lender. Credit unions, especially, can offer flexible personal loans for bad-credit applicants.
What is predatory lending?
Predatory lending is any practice that benefits a lender at the expense of a borrower, such as charging high fees and creating a cycle of debt.
How can you tell a loan is predatory?
If a lender charges triple-digit interest, does not check your credit score or has a history of customer complaints, there’s a good chance the loan is predatory.
What interest rate do predatory loans have?
Many predatory loans have interest rates in the triple-digits. Payday lenders typically have a 391% APR. In comparison, personal finance experts cite 36% as the cap for affordable personal loans.
Are predatory loans illegal?
Predatory loans may be completely legal, even if they have high interest rates, short loan terms and no credit checks. Each state has its own regulations regarding lending, so research your state’s maximum rates before borrowing.
Article sources
- 1. Consumer Financial Protection Bureau. Truth in Lending Act (TILA) examination procedures. Accessed May 2, 2025.
- 2. Center for Responsible Lending. Payday and Other Small Dollar Loans. Accessed May 2, 2025.
- 3. Consumer Financial Protection Bureau. What is a payday loan?. Accessed May 2, 2025.
- 4. Internal Revenue Service. Retirement Topics - Plan Loans. Accessed Apr 8, 2025.
- 5. Internal Revenue Service. Retirement topics: Exceptions to tax on early distributions. Accessed Apr 8, 2025.
- 6. Administrative Office of the U.S. Courts. Bankruptcy Basics. Accessed Apr 8, 2025.
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