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Wednesday Welcome: Protecting Yourself From Predatory Lenders

This week’s post comes from Bill Bartmann, the CEO of debt collection agency CFS2. He reached out to us to offer a post on predatory lending, something he sees all too often in his industry. Read on to learn your rights when it comes to these lenders, who take advantage of vulnerable consumers by lending them the money they desperately need in exchange for exorbitantly high interest rates and fees. 

Bill Bartmann HeadshotPredatory lending is by definition deceptive.  The terms of a predatory loan are presented in such a way that disguises the “gotcha.” If you are strapped for cash, you might be tempted to respond to lenders who market “$1000 approved overnight” or “Bad credit OK!”

But what if the advertisement read: “500% interest” or “Pay too much in fees?” You probably would not be so excited.

Both sets of statements describe the same thing – a predatory loan.

Predatory loans come with different names; payday loans, title loans, tax refund loans.  Even some auto loans and mortgage loans are predatory.  What they usually have in common is rapid approval, short repayment cycles, and high amounts of interest and fees.  Even worse, they sometimes trap a borrower into a cycle that they can’t get out of.

Let’s take a payday loan example for illustration.  John has a big problem because his car needs repairs and he depends on that car every day to get to work.  Fortunately, the repairs only cost $500 and a payday lender is willing to put the cash in John’s hands today.

Two weeks go by and John can’t pay off the loan.  The lender says, “Hey, no problem.  Tell you what:  just give me $100 in interest and we will give you another two weeks.”  John has the cash to make that work.  Another two weeks pass and John still can’t scrape up the $500.  “No problem,” says the lender.  “Pay just the interest and we can roll over the note again.”

Next thing you know, a year has gone by.  John has paid $2400 in interest – almost 5 times what he borrowed — and still owes the original $500.  John may die still owing that $500.

You may think that John’s story was made up to illustrate a point.  Not so.  There are millions of people just like John who are living that experience right now.

The best defense against any type of predatory loan is educating yourself about the dangers and what to look for.  Here are some tips:

  1. Shop around for a loan.  Talk to multiple lenders. Ask friends and neighbors for references.
  2. Negotiate for the best deal.  Try to avoid high rates and fees.  If you must accept a high rate loan, insist on a regular payment schedule that amortizes the loan rather paying interest only.
  3. Refuse to accept a loan that you know you can’t pay back.  Otherwise, your problems only get worse.
  4. The lender is required to disclose to you the “annual percentage rate” of the loan.  Use the APR to understand and to compare deals between different lenders.
  5. Read carefully everything you are being asked to sign.  Don’t let yourself be rushed.  Don’t sign paperwork that you don’t understand or that has blanks not filled in.
  6. Be cautious of bait-and-switch tactics.  Don’t sign anything that has conditions different than what you were promised.
  7. Be cautious about offers that sound too good to be true.  They usually are.

About Bill: Consumer advocate Bill Bartmann is the CEO of debt collection agency CFS2. His first collection business, CFS, helped 4.5 million consumers get out of debt and was a published case study by The Harvard Business School. Bartmann has been called the “No. 1 Collection Industry Consumer Advocate” in the world and was named national “Entrepreneur of the Year” by NASDAQ and the Kauffman Foundation. He is a best-selling author of multiple books who recently published an autobiography, Bouncing Back. All proceeds are donated to charity.

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