And what to do if they’re your only option
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Legal loan sharks are now actively targeting people affected by coronavirus. They promise emergency relief – sometimes actually calling it Covid-19 financial relief – to people who are running out of cash. But their “help” comes with an enormous financial downside that can trap you in a nasty pit of forced continuous borrowing.
Predatory lenders take advantage of desperate people who are struggling to buy food and pay rent. Unfortunately, millions of Americans are stuck in this situation – including so many single moms.
They Seem Like Lifesavers… But Hide the Danger
Predatory lenders act like they’re helping you, but their only goal is making money for themselves. And the financial problems caused by the pandemic just give them extra opportunities to make a buck.
They do that by lending you as much money as possible at the highest interest rate possible. Now that alone isn’t predatory – it just sucks. But predatory lenders disguise the interest rate and fees so it’s hard to tell how much you’re really paying. They may also offer low monthly payments that seem like a blessing but really make it impossible for you to ever pay off the loan.
These lenders don’t care if the debt is too much for you to manage. In fact, they purposely target people who can’t really afford their loans.
High interest rates alone don’t make a loan predatory. Hiding or disguising loan terms, tricking people into loans they can’t afford, and effective interest rates higher than 200%… those are the things that make it predatory.
They want you to end up trapped in a dangerous debt cycle with thoroughly trashed credit, so you have to keep coming back to them to borrow more and more money.
Predatory lenders make me furious because they look for people they can trick and trap – it’s their bread and butter.
But when there’s no other choice, many single moms have to go this route. And if that’s your situation, make sure to protect your current and future finances by knowing everything there is to know about your loan.
When a Payday-Type Loan Really Is Your Only Option
When I was writing this article, I connected with Tyrone Ross, Jr., and he widened my perspective. My first instinct was to warn you against ever taking a payday loan – and I still feel like that’s good advice.
BUT sometimes, it could be the only thing standing between you and a roof or food for you and your kids. And if that’s the case, your family’s health and safety comes first. So get whatever money you can, but go in with wide-open eyes and a clear plan.
“It’s really the rollovers that causes long-term hardship,” Ross said. “The key is to increase education about how the loans work. Because if you need a life preserver, it doesn’t matter what color it is. And when you need money to survive, the source is less important than the survival.”
Payday loans (and similar loans) are designed to keep your borrowing long-term – they expect and want you to keep rolling over your loan.
But you don’t have to get stuck in that trap. If you go into one of these loans with a complete understanding of the terms and a quick, achievable payback plan, you can use these loans when you need them without falling into a never-ending interest pit.
- Insist on reading the entire loan agreement before you sign it
- Ask questions about anything that’s unclear
- Know where and when you’ll get the money to pay it back
- Prioritize paying this back in your budget
- Watch out for true financial predators
If you’re having financial struggles, it’s probably affected your cash flow and your credit score. That affects the interest rates you’ll have to pay to borrow money – you’ll have to pay more to borrow money. But that doesn’t mean you deserve to be scammed or tricked into a shady deal.
Watch Out for These Red Flags
Predatory lenders can be hard to spot, so please be extra careful if you’re even thinking of borrowing money from an unfamiliar source. No matter how far along you are in the borrowing process, stop immediately and get out of there if you spot even one of these red flags:
- Shockingly good deal – too good to be true. Predatory lenders lure you in surprisingly lower-than-market interest rates and instant money no matter how bad your credit is… and maybe even if you’re unemployed. If the deal sounds too good to be true, it is. Read every single word of the fine print and look for extra fees, interest rate hikes, and penalties. The real interest rate – the amount you’ll actually pay – may be outrageously high.
- Hidden collateral grab. Predatory lenders build in ways to get their money back, even if you can’t pay. Many of these loan agreements come with hidden collateral clauses – where you agree to turn over your car, house, or other belongings if you don’t pay according to very strict terms.
- Blank spaces. If a lender wants you to sign a loan contract with any (even one) blank spaces in it, do not sign it. Can’t stress this enough: Never sign a contract with blank spaces.
- Pressure to sign. Predatory lenders will pressure you to sign fast, especially before you have a chance to read through the agreement. They will play on your fears and insecurities to get you to take money from them. If you feel pressured to sign before you’re ready, don’t. There are plenty of high-interest and payday lenders out there.
- Mandatory electronic payments. If giving the lender direct access to your bank account is the only form of payment they accept, that’s a problem. Non-predatory lenders offer that as an option, usually in exchange for reduced fees or interest rate. Predatory lenders require this so they can request payment repeatedly until it goes through, which can leave you on the hook for multiple overdraft fees.
- Refusal to answer questions or vague answers. If you have questions and the lender won’t give you straight answers, go somewhere else. Predatory lenders may try to “reassure” you that they’ll take care of everything… that this is a standard contract… that there’s no need to get bogged down in these details. They prefer for loan terms to remain unclear, so if you try to fight them later, you can’t win.
Remember, predatory lenders know you’re in an impossible situation. That’s why they’re courting you. They’re hoping that you’re so desperate for money that you’ll sign anything they put in front of you – no questions asked.
And they’re hoping you won’t notice that you’re agreeing to pay interest rates higher than 100% – meaning you’ll have to pay back at least twice as much as you borrowed.
Why the F*** Isn’t This Illegal?!
Predatory lending should be illegal – but it isn’t always.
The federal government offers some limited protections. Only twenty-five states have specific anti-predatory lending laws.
But even where the practice is illegal, these guys use loopholes or just flat-out break the law. And it’s very hard
It’s up to you to protect yourself and your finances. So know the signs and walk away… even if you’re desperate for cash. Your already dicey financial situation will get worse if you borrow money from a predatory lender.
Even if you need something like a payday loan, look for a lender that’s open and honest about the agreement you’re signing. Look for reputable lenders who will try to work with you and walk you through the process.
Again, just because something comes with a high interest rate doesn’t mean the lender is predatory. If you have bad credit, no accounts in a traditional bank, a lot of debt relative to your income, you should expect to pay higher than average interest rates—just not abusively high rates. If you have any doubts at all about a lender, take a step back and do some checking. You may be better off trying somewhere else.
If you’re stuck with a true predatory loan, there are things you can do to fight it. Report the lender to the Federal Trade Commission (FTC) (www.ftc.gov). Talk with a lawyer to see if you can escape the loan or sue the lender under the Truth in Lending Act (TILA). There are protections available, but you have to activate them.
Other Options to Consider
If you want to avoid predatory lenders and ultra-high interest payday loans, there may be some other options you can try.
Credit unions focus much more on customer service than profits – the complete opposite of regular banks who prioritize shareholders and stock prices over the customer experience.
When you need quick cash, consider these options over more expensive payday loans:
- an advance on your paycheck either directly from your employer or through an app like Branch, Chime.
- a payday alternative loan (PAL) from your credit union (if you don’t belong to a federal credit union, join one), as these loans are designed to help you pay them back.
- borrowing money from family or friends – but do it the right way with a signed note and a specific payback schedule that you can easily follow.
- government assistance to help you pay bills and make ends meet: check out BenefitFinder at www.benefits.gov for federal aid and the Community Action Partnership (CAP) at www.communityactionpartnership.com for local aid options.
A combination of these options can keep you away from the often-permanent financial damage caused by impossible-to-pay-back predatory loans and cycling payday loans.
It can be anxiety-causing hard to ask for this kind of help, but going this route can protect you from losing your car or your home or your financial future to a predatory lender.
You can learn more about options for borrowing money and the best ways to manage debt in my book, Debt 101.
More important, when you’re back on more solid footing, put a realistic budget in place. And if you’ve been stuck living paycheck-to-paycheck, start with this plan to help you break out of that cycle and start building up your finances.