Predatory Lending & Bad Credit Loans
Consumers with bad credit histories are often times unfortunate victims of financial scams as well as relentless loan sharks. So what is a loan shark? It’s a person or company that loans money to an individual at extremely high interest rates–sometimes regulated by the government but often times not. In many cases the term is subjective in nature.
Whilst a bad credit lenders such as payday loan companies may be acting in complete compliance under government regulation and policies, their lending practices are often times frowned upon by financially educated consumers and financial activist groups. However still, many will argue that such loans provide a much needed service to individuals in financial distress. The problem in many cases is that such individuals are charged such extreme amounts of interest that it then becomes difficult to pay the loan off…thus compounding the debt, and in many cases causing the borrower to apply for yet another high interest, high risk loan. To better understand legalities and ethics, here’s an overview of “loan sharks” and how their product/service is utilized in the marketplace. Because of the high interest rates these lenders charge, many will agree that the term “loan shark” is sufficient.
I. Legal and Regulated Lenders
Payday Loan Companies – Many people will often agree that payday loan companies are in the same category as “legal” loan sharks because of the high interest rates charged. How does a payday loan work? It works like this. Borrowers must write a personal check to the cash advance lender for the amount they wish to borrow PLUS the fee charged by the lender. The personal check is post dated and deposited into the lenders account on the borrowers next payday…in most cases. New payday lenders have sprouted up that allow longer repayment periods in excess of 100 days.
Although this doesn’t necessarily mean its a better option. Payday lending is legal in 37 states within the United States. For a complete list of states where payday lending is legal, click here [will be updated in the future]. In the United Kingdom (UK), lenders are required to state the APR (Annual Percentage Rate), yet there currently is no interest ceiling that lenders must abide by. In other words, cash advance lenders in the UK can get away with charging astronomical interest rates. In the United States, according to the federal Truth in Lending Act, lenders are required to tell you the cost of the loan. This includes any and all finance fees, the APR, and the complete terms and conditions–before you sign the loan.
Bottom line? Such loans are legal for the most part as long as the company is compliant with all governing laws. However, should you be in a desperate financial situation it’s recommended that you use these services as a last result.
First, speak with someone at your local credit union. For a complete list of alternatives, you can read this article [to be updated in the future]. Additionally, if you know of a payday loan establishment operating in an illegal fashion–or you or someone you know has been scammed by a payday loan company–then report them here.
Auto Title Lenders – It’s just as it sounds. A borrower provides their car title as collateral for a loan.
In most instances, lenders do not check the credit history of the borrower and only care about the vehicles value and condition in terms of lending cash. Additionally, this short term loan comes with extremely high interest rates. Regarding auto title loans, most loaner’s will offer up to half of the vehicle’s value. In some instances, a borrower can earn a bit more depending on the value and condition of the vehicle.
Again, because of the legalities involved with such lending practices, the interest rates and laws vary by state. Companies require that borrowers have a free and clear title; or in other words the owner must have the entire loan paid off with no current financing in place. Interest rates on such loans can range anywhere from 36% up to 100% and beyond. These types of loans are considered to be risky for lenders, thus they charge high interest rates. In the event the borrower cannot repay the loan, they can elect to “rollover” the loan–or in other words, start the loan process all over again (depending on state laws).
Should the borrower not have the funds to repay the loan and/or cannot rollover the loan, the lender can thus begin taking action to repossess the vehicle. This is often a last resort due to the high costs involved in repossessing the vehicle. In the UK, a similar type of auto title loan lending practice takes place. It’s called logbook loans. You can read more about UK logbook loans here. [to be updated in the future] Bottom line? Keep your car. Their are much better bad credit personal loan options than sacrificing your vehicle.
Pawn Shops – Pawnbroking has been in existence as early as 3000 years ago in China. The business model hasn’t changed much and has remained relatively the same. It works like this. An individual or business owner will offer a secured loan to a person in financial need for collateral.
The borrower usually has a certain amount of days to repay the loan and thus get their collateral back. In the event the borrower cannot repay the loan, the pawnbroker has the right to keep the collateral and resell it to compensate for his time and the loan amount given. Pawnshops are listed as legal loan sharks because of the low value they put on goods and high markup given to these same items when reselling. Many pawnbrokers take advantage of poverty stricken areas, just like other bad credit lenders. Although, the positive side of dealing with such a broker is that you have the option to get your personal items back if you repay the loan before the repayment term expires. Bottom line? Use a pawnbroker as a last resort and most certainly before any of the above mentioned alternative lending options.
II. Illegal and Unregulated Lenders
Illegal Loan Sharks – A person or group of individuals that loan money at exceedingly high interest rates–much higher than the maximum limit that most states and government institutions allow. Unregulated loan sharks are often known for not only charging astronomical APR, but enforcing repayment through brutal harassment techniques as well as hardcore violence, and in some cases murder.
UK loan sharks are among some of the most notorious lenders and with a growing population that is digging itself even deeper in debt, this money hungry group of lenders have a full on feeding frenzy on their hands. Loan sharking has been linked with organized crime units all over the world and continues to this very day–worsening in fact. Legal loan sharks in the UK are approaching the fine line of illegal loan sharks–mostly due to the insanely high interest rates they charge.
However, the payday lenders such as these cannot impose physical violence or harassment on borrowers. Illegal lenders, however, can…and they do. Bottom line? Never use illegal loan sharks…no matter how desperate your financial situation may seem. If you or someone you know is a victim of illegal loan shark practices, then report them