Predatory lenders purposely and systematically offer unfair loan terms to borrowers, using a business model that “benefits the lender and ignores or hinders the borrower’s ability to repay.” While Exodus Lending is actively working to stop predatory lenders from operating in the first place, until then, you can become a more informed loan borrower with these tips on how to identify, escape from, and avoid predatory lenders.
The first step toward being an informed borrower is to know how to determine if a lender or loan is reputable or not. Therefore, ask yourself these three questions, and if the answer is ‘NO’ for any of them, the lender is predatory:
State law makes it clear that all lenders that make loans to borrowers in Minnesota must comply with rate caps and licensing requirements. There is also a nationwide 36% interest rate cap for active-duty military members.
Federal law also requires lenders to provide, in writing, a Truth in Lending Disclosure that clearly outlines the cost of the loan, with these key details included:
Any loan with an APR greater than 36% is generally considered predatory. For example, here is a Truth in Lending disclosure from a predatory two-week, $500 payday loan:
|APR||FINANCE CHARGE||AMOUNT FINANCED||TOTAL OF PAYMENTS|
Some licensed, fee-compliant lenders are still predatory because they offer unaffordable loans. However, reputable lenders will verify the borrower’s ability to repay. For example, they might analyze your debt-to-income ratio to confirm you can afford to repay the loan while also meeting your other financial obligations.
To ensure you can answer ‘YES’ to all these questions, complete this checklist BEFORE borrowing a loan:
☑. Contact the Minnesota Department of Commerce to verify the lender is licensed.
☑. Read the Truth in Lending disclosure and ensure the APR is legally permissible.
☑. Review the repayment terms and assess if you can repay without undue hardship.
Furthermore, the second step to being an informed borrower is knowing that you have rights and deserve to be treated with respect and dignity. If you, unfortunately, have already taken out a predatory loan, try the following to break free:
There are also several resource databases available online to help you find non-predatory credit options or programs to help you meet your basic needs without taking out a payday loan.
Money Management E-Newsletter: August 2021