Imagine needing some extra cash. So, you walk into a bank, chat with the manager,
exchange documents, fill out a few forms, sign, and walk out the door with the money
you wanted. This seamless process is how most people worldwide get their loans,
a testament to the efficiency of our modern financial system.
For the lucky few, this system seems perfect. But, if you take a closer look, you'll notice that not
everyone has such easy access to credit cards, mortgages, car loans, and other types of credit.
There's a darker side to our economy most of us are oblivious to.
Unbeknownst to most people, the economy has millions of people completely cut-off
from the financial system. Without access to banks, credit unions and financial companies,
these forgotten individuals have little choice but to deal with predatory lenders - unscrupulous
characters who prey on their vulnerability with astronomical interest rates, sky high fees,
and at times, the threat of violence to recoup their money.
These people's sad stories reveal a troubling and disturbing truth about the financial
system. And it's a real eye-opener, showing us what's really happening beneath the surface.
This is the dark side of the economy, predatory lenders.
It’s been reported that as many as 5.9 Million households in the US don’t have any relationship
with a traditional bank meaning that no one in those homes has a checking’s account,
savings account, or even cashes their paychecks at mainstream banks
or institutions. They are known as the “Unbanked,” and they make up almost 5% of
the U.S. population. These people as well as the “underbanked” who make up another
14% of the population or about 19 Million households are some of the main targets,
and often times victims of predatory lenders that mislead and manipulate borrowers, often taking
advantage of their lack of financial know-how, to steer them into loans they can’t afford.
According to Investopedia, a typical example of a predatory lender is a loan shark,
someone who lends money at very high interest rates and might even
resort to violence to get their money back. But, if you take a closer look,
several other reputable professionals, and firms such as banks, finance companies,
mortgage brokers, attorneys, and real estate contractors also engage in predatory lending.
In fact, in 2011 and 2012, the Department of Justice reached a $335 and $175 Million
Settlement to Resolve Allegations of Lending Discrimination by Countrywide
Financial Corporation and Wells Fargo, respectively. Basically,
money lenders use unfair, deceitful, cunning tactics to lure desperate borrowers into taking
a loan from them, whether for a house, a car, or just their daily expenses.
In most cases, it’s not the loans that are predatory, but specific practices. For example,
car loans, and short-term loans are perfectly valid loans. But if a lender sells you a car
loan without disclosing the fact that your interest rate will go up after the initial
period, that’s a type of predatory lending known as bait and switch,
and I’ll tell you a few more in a few. The point is, it’s the deception that makes it predatory,
not the type of loan. One common predatory loan is payday loans.
Payday loans – also called check advance or cash advance loans, are small, short-term
loans – typically under $500 – designed to support you, until your next paycheck comes in. And when
that paycheck comes, you pay the loan back immediately, in full. If you don’t, the lender
can “legally,” access and withdraw the money from your bank account without asking or telling you.
Payday loans are popular and easy to get, they require no credit check and no collateral,
all you need to do is show the lenders proof of income, such as your pay-slip,
and you’re good to go. This makes them very popular with borrowers who have few assets
and bad credit or no credit at all. In fact, these loans are so popular that, a 2021 Pew’s
survey found that 12 million Americans use payday loans each year, borrowing an average of $375 each
to pay for utility bills, rent, car repairs and other recuring expenses or emergencies.
While these loans are easy to get, in the long term, these loans often lead to bigger problems.
Borrowers who use them can end up trapped in a cycle of debt, paying far more in interest
each year than they borrowed. On average payday lenders pay $520 in fees to borrow $375. That’s a
sky-high interest rate of 138% in comparison, the average credit card interest rate is around 17%.
Some payday loan fees are even worse,
charging fees ranging from $10 to $30 for every $100 borrowed over two weeks.
That works out to an outrageous annual interest rate between 260% and 785%.
You see, the reason these lenders can legally take money from your bank account is because you gave
them access. One of the requirements these lenders ask is that you give them access to your bank
account information and permission to withdraw funds from your account electronically. In the
case you don’t pay the loan on the due date, the payday lender simply seizes the money in your
account. They either cash your check or deduct the full loan amount from your bank account.
However, if you want to renegotiate the loan, you can return to the loan office and renew it by
paying another fee. Many borrowers do this several times in a row, paying more fees each time.
In fact, this is what usually happens — and how payday lenders make most of
their money. A 2021 study by the Consumer Finance Protection Bureau found that more
than 60% of people who took out payday loans still owed money on them six months later.
Now, imagine you're searching for a new home, and you find the perfect one, but you can’t afford it,
usually this is where you would get a mortgage and slowly payoff the loan,
but you don’t qualify for a mortgage, the bank rejected your application
citing, poor credit score and history, not enough saved, or huge debt.
In despair, you share your grief with a close friend, who in turn,
promises to help. A few day’s later you start getting calls from a lender who
says they can help you with your situation, they’ll give you the home loan you want. And
they sweeten the deal by giving you lose terms, and playdown the payback
period as long as you have some equity in the house. Sounds like a dream wouldn’t you say?
But that’s not the end of the story.
In your desperation to own a home, you take the bait and do all the loan paperwork,
not knowing the loan is set up in such a way that
it allows the lender to take your equity in the house. Sneaky right?
Even if your income is low, you can’t qualify for the loan,
the lender will ask you to lie about it on the loan application so that you can qualify for it.
But here's the heartbreaking part: after everything is said and done,
you realize you can't actually afford the monthly payments,
the interest is sky-high, and the payback period is terrifyingly short. Eventually,
you end up defaulting on the loan and losing the home through foreclosure.
The worst part is? The lender doesn't really suffer any losses. They sell the
home in foreclosure and make more money than they lent you. It's a predatory scheme called
"equity stripping," where they strip away your home and profit from it while leaving
you with nothing. It's a depressing situation that most Americans have found themselves in.
“Equity stripping” is just one of the many strategies predatory lenders use.
Others you should watch out for are the, Bait-and-switch scheme:
This is when a lender changes the loan terms after you've agreed to them,
usually to their advantage. Loan flipping, loan packing, hidden balloon payments,
Reverse redlining and Mandatory arbitration are a few of the many scheme’s lenders use.
Predatory loans can come in many different shapes and forms, usually, very sneaky,
very subtle and inconsequential but if you see any of these “three
elements” be cautions because you just might be their next victim.
First, the lenders may give you the loans solely based on your assets,
while playing down what should be a major factor, your ability to repay the loan.
Second, they’ll try persuading you to refinance your loans so they can earn unnecessary fees.
And lastly, trying to conceal specific loan details from you, calling them “just
a bunch of unimportant technical words, that have no impact whatsoever on you.”
Now, Payday loans (Which I just told you about), Auto title loans,
and Subprime mortgages, are the three main loans they use to trap victims.
Subprime mortgages are usually given to people who have bad credit and are unlikely to repay
the loan, and default. The interest rate and fees on this loan is also sky high and far
higher than those on prime loans, which are given to borrowers with good credit.
According to Equifax, a credit reporting firm, subprime borrowers are known as
people with credit scores under 650, which for banks is considered high risk.
You see, credit scores often range from 300 to 850, but some FICO score
calculators go as high as 900. And allthough there is no set number for
a “bad credit score," you are considered high risk if your score is under 650.
So, if you're in this category, you're a prime target for bad credit loans because
lenders are not going to offer you the best loans with the lowest rates.
If you don't know if your credit score is good or bad,
compare your score with this graph which shows the industry accepted range.
The third loan is Auto-title loans. These are single-payment loans based on how much your car
is worth. Like all predatory loans, they also come with high-interest rates, and you have to hand
over your car’s title and an extra set of keys as collateral. If you are unable to repay the loan,
your car is taken. And this does not only affect your finances; it can also disrupt your life.
Without a car, its hard to go to work, do everyday tasks, or look after your kids.
So, if these loans are so bad, why are most Americans still taking them?
Many people and families using payday or auto title loans don't have enough money
to pay their monthly bills. They usually need this money for regular payments and unexpected
emergencies. Research indicates that women and people of color often use payday loans more.
Actually, over half of the people who borrow payday loans are women,
and African Americans are twice as likely to use these loans than others.
This trend is also noticeable in the income and wealth disparities,
and because most payday loan stores are found in African American and Latino communities.
This situation is tied to factors that affect their financial conditions, such as: Low wages,
where salaries haven't increased much over time, and any increases are offset by rising
costs due to inflation. Also, the widening gap between the rich and the poor is another factor.
If you enjoyed this video and would like to know whether your prepared for retirement,
make sure you watch this video.