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Predatory lending is when a lender uses unfair or deceptive tactics to lead a borrower into taking a loan that carries terms and conditions they cannot afford.
Some predatory lenders target borrowers with low income and bad credit — those with credit scores from 300 to the high 500s — but anyone can fall victim to predatory lending if you don’t know the warning signs.
Given the long-term financial harm of predatory loans, NerdWallet encourages consumers to consider alternatives whenever possible. See our list of safer options lower down.
Signs of predatory lending
Consumer advocates don’t always agree on what constitutes predatory lending, but there are common warning signs to identify personal loans to avoid.
Many consumer advocates consider 36% the maximum annual percentage rate (APR) for a loan to be considered affordable, but many predatory loans have APRs of 300% or higher. A loan’s APR shows you the full cost to borrow money, including interest and fees.
The high APR may not be obvious because predatory lenders often advertise a loan’s cost as a flat fee, i.e., $10 to $30 for every $100 you borrow. But because many of these loans have terms of just a few weeks, the cost often translates to a triple-digit APR. If a borrower can’t repay the loan, they’ll typically incur additional fees.
Lenders are legally required to state the loan's APR before you sign a loan agreement. If basic product information is missing or hidden in the fine print, and the lender does not answer your questions, steer clear of the company.
The loan seems too good to be true
Be skeptical if a lender makes an offer that seems too good to be true. You may see ads from companies promising to mend damaged credit, settle debts for less than you owe or guarantee loan approval without reviewing your credit history.
Look for the catch before signing any agreement. The price for speed and convenience may be high fees or being forced to give up your assets, which can trap you in a cycle of debt.
» MORE: Signs of a personal loan scam
No credit check
A lender that forgoes a credit check before offering you a personal loan does not assess how you’ve handled debt in the past or whether you can afford to repay more debt.
Predatory lenders make up for that risk by charging high rates, typically well above 100% APR, and structuring loans with high fees.
Such high rates and fees are considered predatory by consumer advocates because they add significant costs and make it hard for the borrower to pay back the loan within the given term.
In practice, a predatory lender might:
- 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 at the end of the loan term.
- Encourage repeat borrowing or extending the loan.
» MORE: What are no-credit-check loans?
Payments aren’t reported to credit bureaus
A reputable lender reports on-time loan payments to one or more of the three main credit bureaus — Equifax, Experian and TransUnion — allowing you to earn a better credit score, lengthen your credit history and qualify for cheaper financial products in the future.
Predatory lenders typically don’t report on-time payments to the credit bureaus, but they may report if you default on your loan and the debt goes to collections. An account in collections can significantly hurt your score.
» MORE: How to build credit
A history of customer complaints
Do your homework on the lender’s online reputation, just as you’d turn to the internet to check restaurant reviews. Check its rating and customer reviews at the Better Business Bureau and see how many complaints are registered against the company. You can also search the lender’s name in the Consumer Financial Protection Bureau’s complaint database.
Keep in mind that even reputable lenders often have a high number of complaints. To spot a predatory lender, look for patterns, like frequent complaints involving:
- Unexpected charges for interests and fees.
- Attempts to collect debt not owed.
- Money withdrawn from bank accounts on the wrong day or in the wrong amount.
- Difficulty contacting customer support.
- Issues with receiving loan funds.
- Harrassing or abusive debt collection practices.
Common types of predatory loans
There are several types of loans that could be predatory. Here are a few examples.
Payday loans
Payday loans are one of the most common examples of predatory lending because they have high fees and short repayment terms. Borrowers must provide a post-dated check for the full amount borrowed plus fees or authorize an automatic withdrawal from their bank account.
Many borrowers wind up rolling over the loan for an additional fee. After a few months, the extra charges can easily add up to more than the original loan amount.
Car title loans
Car title loans, or title loans, are short-term loans where you put up your vehicle’s title as collateral. To qualify, you typically must own your car outright or carry a small balance on your car loan. You can usually borrow amounts of 25% to 50% of your vehicle’s value.
Many title lenders charge a monthly finance fee of around 25% of the loan amount, which amounts to a 300% APR. Repayment is typically due within 15 to 30 days, but many borrowers roll over their title loans. If you don’t repay the loan as agreed, the lender can repossess your vehicle.
High-interest installment loans
Some loans are structured as traditional installment loans but have APRs well above 36%. High-interest loans come in amounts as high as $10,000 and have repayment terms of up to two or three years.
The high APR and long repayment term add up to significant interest over time. Faced with unaffordable payments, many borrowers refinance their balance into a new loan with a longer repayment term, which results in more interest paid over time. Many borrowers end up paying over 50% of the original loan amount in interest.
Example of predatory lending
Say you need $400 for an emergency car repair, and you go to a payday loan store to borrow the money. The average payday lender charges about $15 in fees for every $100 borrowed, according to the CFPB. For a $400 loan repaid in two weeks, that’s $60 total, which equates to an APR of 391%.
But, like many borrowers, you can’t repay the loan by your next payday. So you roll over or extend the loan for another $60 fee.
Four weeks after taking out the loan, you’ve accumulated $120 in fees — on top of the original $400 loan. Paying off the loan leaves you short on rent money. So you take out another payday loan for $400, plus a $60 fee, beginning the cycle again.
Make sure to calculate the APR before taking a loan of any kind. Though lenders should make the APR readily available, many payday lenders mention “fees” instead, which can get confusing. Use the calculator below to determine the APR.
Alternatives to predatory lenders
An ideal lender checks your credit and ability to repay a loan, lends you amounts that match your financial need and clearly discloses the total cost of taking the loan. It also does not encourage repeat borrowing.
To avoid a potentially predatory lender, explore other ways to get money, including:
- 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.
- Small bank loan: Many major banks, including Bank of America, US Bank and Wells Fargo, offer small loans (typically $1,000 or less) to existing customers. Eligibility is often based in part on your checking history with the bank, which makes it easier to get approved if you don’t have good credit.
- 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. It’s best to skip the the optional tip and fast-funding fees these apps offer.
- Community organizations: Local nonprofits, religious groups and community organizations may provide funds for necessary expenses like rent, utilities and groceries. Start your search for help at www.211.org.
- 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.
Frequently Asked Questions
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.
