When you’re in a financial emergency, getting the money you need immediately can seem like the No. 1 priority. But it’s exactly this vulnerability that predatory lenders are looking to leverage. Knowing what to look for and understanding that you have other options is critical to your financial well-being.
If you’re considering how to handle an immediate financial need, here’s how to avoid debt traps and find the right option for you.
Spotting Predatory Lenders
Predatory lending can typically be characterized as unfair and deceptive practices that exploit borrowers, often targeting financially unstable populations or those with limited access to credit. Signs to look out for include:
- Excessively high-interest rates
- Hidden or unclearly defined terms
- Using your home or car as collateral for a loan you may not be able to repay
- High-pressure sales tactics pushing you to an agreement before you’ve had time to read it
- Upfront fees (typically means it’s a scam)
- Balloon payments that start with lower payments and end with one large payment
Predatory lending can often end up with the borrower feeling trapped in an endless cycle of debt and repayment.
Beware the Pay Day Loan
One type of predatory lending is the payday loan, which is a short-term, high-interest loan that is typically paid off within your next pay cycle. While the amount borrowed is within the hundreds of dollars (not thousands), the interest rates are often an annual percentage rate of 300% or more, much higher than a credit card or personal loan.
When the borrower can’t pay back the full amount by the due date, they roll it over, creating ballooning debt. Payday loan lenders may also require an upfront payment in the form of a check or access to your bank account. If you don’t have the funds to cover the cost on the day it’s due, you can get charged penalties from your bank, and your default may get reported to the credit bureaus, impacting your credit score.
Practical Solutions for Financial Stress
If you’re struggling to make a payment or have a financial emergency, there are ways to handle it that won’t wind you up in even more debt.
- Credit Union or Employment Loan: Try consulting with a credit union or seeing if your employer has a loan program. These will be less expensive, have smaller interest rates, and will be easier to pay back.
- Credit Counseling: Nonprofit credit counseling agencies provide guidance on budgeting, setting financial goals, and improving financial literacy. They can help you handle debt responsibly, protect your credit, and avoid taking on additional debt.
- Community Help: Nonprofit organizations, charities, and local governments often have programs that can provide financial aid during emergencies.
- Payment Plans: If you’re struggling to pay a bill, call your lender and inquire about getting on a payment plan that’s more affordable for you.
- Save: Start setting a little bit of money aside for emergencies. Even a few hundred dollars can keep you afloat during financial challenges.