Predatory lending is a type of lending service that refers to practices that are unfair or abusive to borrowers.
They can result in a cycle of debt that can be really difficult – and sometimes impossible – to overcome. Examples of this are cash advance and payday loan offices which offer payday loans and can be considered predatory in nature.
The Center for Responsible Lending said it best, “payday loans create a debt treadmill that makes struggling families worse off than they were before they received a payday loan.”
The impact of predatory lending goes far beyond just financial harm. It can have a significant emotional, physical and social toll on the affected individuals, their families and entire communities.
Payday lenders have been criticized by consumer advocates and regulators for engaging in predatory lending practices. Here are several reasons why this industry has been widely criticized and accused of engaging in predatory lending practices.
Charging sky-high interest rates
Payday loans often carry high-interest rates, which can be difficult for borrowers to repay. In many cases, the interest rates can be so high that borrowers end up owing more than they originally borrowed. Reading the fine print with a close eye can be a good way to spot a predatory lender.
Offering really short repayment periods
Payday loans are meant to be repaid in a short amount of time, oftentimes within just a few weeks. This rapid turnaround can be difficult for some borrowers, especially for people who are living paycheck to paycheck whichwas 64% of U.S. consumers in 2022 (166 million), according to a joint study by Lending Club and PYMNTS.
Just being “okay” with customers borrowing repeatedly
Some borrowers may find themselves trapped in a cycle of debt, where they repeatedly take out new payday loans to pay off the balance and interest of previous loans. This can lead to a cycle of debt that can be really dangerous and difficult to escape.
Using deceptive marketing tactics
Some payday lenders have been accused of using deceptive practices to lure in borrowers, such as advertising low rates or not disclosing all of the fees associated with the loan.
To sum it up, predatory loans are a serious problem that affect millions of people. Especially in today’s economy, more people are in need of financial support to pay for life’s necessities including - housing costs, utility bills, gas and groceries to name a few big ones.
If you or someone you know are considering taking out a payday loan, it’s important to consider the risks it can come with. There are many alternative options available to consumers that may be more beneficial in the short and long-term. If necessary, consider talking to a financial advisor before making any big moves financially.