{"id":17334,"date":"2020-11-11T12:28:49","date_gmt":"2020-11-11T16:28:49","guid":{"rendered":"https:\/\/www.shortform.com\/blog\/?p=17334"},"modified":"2020-11-21T15:05:53","modified_gmt":"2020-11-21T19:05:53","slug":"examples-of-predatory-lending","status":"publish","type":"post","link":"https:\/\/www.shortform.com\/blog\/examples-of-predatory-lending\/","title":{"rendered":"Examples of Predatory Lending and Bad Loans"},"content":{"rendered":"\n

What are some examples of predatory lending<\/a> practices? How does a predatory loan operate and why is it bad?<\/p>\n\n\n\n

Examples of predatory lending practices show how these loans take advantage of certain vulnerabilities. They are likely to leave people worse off than they started.<\/p>\n\n\n\n

Read on to understand more with examples of predatory lending practices.<\/p>\n\n\n\n\n\n\n\n

Examples of Predatory Lending Show the Focus on Quick Fixes<\/h2>\n\n\n\n

Payday loans, rent-to-own deals, and \u201ctote the note\u201d car lots are examples of predatory lending schemes<\/strong> intended to exploit low-income people who are looking for a quick fix or instant gratification<\/a>. <\/p>\n\n\n\n

These examples of predatory lending practices are always located in a poor section of town, because low-income people are the ones most vulnerable to being ripped off this way (wealthy people won\u2019t bite). If you\u2019re poor and you sign on to one of these \u201cdeals,\u201d you\u2019ll remain poor. Here\u2019s how the most common scams work:<\/p>\n\n\n\n

1) Payday loans:<\/strong> This is legal loan sharking. For example, you write a postdated check for $225 (dated for payday). The lender gives you $200 in cash and keeps a $25 service fee (this fee equates to 650% interest annually).<\/p>\n\n\n\n

When people can\u2019t pay back their loan, they borrow money to do it from another lender and soon get snared in a web of loans with lenders threatening to sue them for writing bad checks. The only way out is to stop paying and meet with each lender to develop a payment plan, then figure out how to pay the loans. These examples of predatory lending show the power imbalance<\/a>.<\/p>\n\n\n\n

2) \u2018Tote the Note\u2019 Car Loans:<\/strong> Tote the Note dealers offer their own in-house financing for people with bad credit, another one of the examples of predatory lending practices. They take a downpayment close to the amount they paid for the car, then charge 18% to 38% interest on a loan for the rest. If the payments aren\u2019t made, they\u2019ll repossess the car and sell it again.<\/p>\n\n\n\n

3) Rent-to-own:<\/strong> If you succumb to instant gratification by agreeing to rent-to-own something, you\u2019ll pay a high price: average interest rates exceed 1,800%. It works this way: to get something they can\u2019t afford, people rent items at a weekly rate, which seems affordable. Over time, however, they pay far more than the items typically sell for. For instance, they might pay $20 a week for a washer and dryer over 90 weeks, or $1,800, when you could buy new (low-end) appliances for $500 or used ones for even less.<\/p>\n\n\n\n

4) Ninety days same as cash:<\/strong> Many people believe that signing a \u201c90 days same as cash\u201d deal, where you don\u2019t pay interest for that period, means you\u2019re using other people\u2019s money for free, but it is a predatory loan. These deals are popular for furniture, appliances, and electronics. The problem is that most people (over 80%) don\u2019t pay off the purchase in 90 days (or in 30 or 60, if that\u2019s the deal). When that happens, the deal becomes a loan with interest rates of 24% to 38%. In addition, the interest is charged back to the purchase date. Even if you make the payments as scheduled or pay it off early, you may still be charged interest if fraudulent fees were added.<\/p>\n\n\n\n

Car Payments and Leasing Are Unavoidable<\/strong><\/h2>\n\n\n\n

Beyond the examples of predatory lending practices, there are also just bad loans that you should avoid. Many people believe car payments are simply part of life, that you\u2019ll always be paying on a car.  But this is a myth\u2014car payments are both foolish and avoidable.<\/p>\n\n\n\n

Purchasing a new car with loan payments eliminates your ability to build wealth<\/a>.<\/strong> Car payments are most people’s biggest monthly outlay except for a mortgage, so they diminish or steal more from your income than any other expense.<\/p>\n\n\n\n

Over a lifetime of car payments, you\u2019ll literally spend a fortune.<\/strong> Most people start paying on a car, then continue car payments on successive cars throughout their lives. <\/p>\n\n\n\n

Car payments are worse than a rent-to-own deal even though they’re not truly a predatory loan. Consider an average monthly payment of $495 over 64 months:<\/p>\n\n\n\n