Predatory lending is still a major issue in the United States. The phenomenon of predatory lending is not new but has morphed significantly over the decades. Fraudulent and even malicious cases of abusive lending practices have become numerous enough that local legislatures are beginning to respond. In 2010, voters in Montana slapped a 36 percent interest rate limit on payday loans. More recently, Alabama legislators on both sides of the aisle have begun to push back against predatory loans with interest rates averaging 300 percent.
Although some state and local legislatures are pushing back against predatory loans, many are not. This leaves many everyday Americans at risk of falling victim to the cycle of predatory lending abuse. The victims of predatory loan practices usually find themselves in the same situation; financially struggling and in desperate need for cash. Predatory lenders step in at the right moment and offer a temporary solution, but with strings attached. The borrower is stuck with high interest rate payments that spiral out of control. The cycle is vicious, but there are steps that can be taken to protect yourself.
In order to protect yourself against predatory lending practices, the very first step is to prepare an emergency fund. Predatory loan peddlers specifically rely on people who’ve fallen on hard times and need cash fast. An emergency fund can help pad against the financial burden of an emergency and can provide an alternative to a payday loan. If you’re strapped for cash already, you can reduce your expenses and use the savings to build your emergency fund.
Before signing any legal documents, read the fine print of any loan application or agreement. Look for the annual percentage rate (APR) and see if you are being offered a realistic interest rate. Anything higher than 35 percent is considered extremely high and risky. Interest rates below 30 percent can still be dangerous if interest is allowed to accrue on a large balance. You can ask your loan officer to put any fees you owe in writing. It would also be best to shop around with various banks and other lenders and find the best deal available.
If at all possible, avoid variable interest rates on any loan you decide to apply for. One of the biggest issues in modern debt markets is variable interest rates, especially when the interest rate on many consumer loans changes rapidly. Many lenders will entice borrowers with low interest rate introductory offers. For a period of time, your interest rate payments will seem small. But after some time, your variable interest rate will increase significantly, causing your monthly interest rate payments to swell enormously. Fixed-rate loans are preferable to variable interest rate loans.
Should you ever find yourself trapped in the cycle of predatory lending, equip yourself with knowledge in order to protect yourself. If you feel as though you’ve been abused by a financial institution, you have legal recourse, such as hiring a lawyer and suing. The government also offers various services to combat predatory consumer loans. Your first and best line of defense is the Consumer Financial Protection Bureau. The CFPB provides a platform for people to issue complaints against companies, products and services. Companies are required to resolve all but the most complicated complaints within 15 days.
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