PREDATORY LENDING PRACTICES; HOW TO IDENTIFY AND AVOID AN UNFAIR LOAN.

Sarah’s trouble began after the COVID-19 pandemic. Lacking the capital to restart her business and the collateral security to obtain a loan from a bank, she downloaded a digital lending app and took a loan.

In emerging countries like Nigeria, funding for individuals and entrepreneurs is limited because traditional lending methods typically involve high-interest rates and collateral. As a result, borrowers seek alternative financing options from microfinance banks and digital lenders due to the ease and speed of funding, reduced documentation, and lack of collateral requirements.

The widespread adoption of these financing options has led to an increase in predatory lending. These lenders prey on borrowers by using unfair and deceptive sales practices to disguise the actual cost of a loan and take advantage of their vulnerable and desperate conditions.

In Sarah’s case, the loan offer came with hidden charges and exorbitant late fees, which increased the overall cost of her loan, trapping her into more debt.

The best time to identify a predatory loan is before signing the offer. Here are some ways to identify predatory or unfair loans so that you do not fall victim, as Sarah did.

1. Unrealistic Interest Rates: Exorbitant interest rates are a classic sign of predatory lending. However, interest rates vary depending on the lender, loan type, and duration. Choose a lender that meets your financial and personal demands and cares about your financial well-being. High-interest rates should be a red flag, as they indicate that a lender is more interested in taking advantage of you than providing affordable loans. When interest rates are high, balances often grow faster than you can keep up with, and you become entrapped in debt cycles.
2. Unclear Loan Terms: Predatory lenders often distort the actual cost of loans, making the terms difficult to understand. It is important to seek clarification by researching the meaning of the loan terms or asking a professional to educate you about the loan terms. If possible, take a few days to consider the proposed terms before accepting them. That gives you time to review the loan impact before making your final decision. And if basic product information is missing or hidden in the fine print, beware! The lender might be a predatory lender.
3. They Encourage You To Take Another Loan To Repay Them: Predatory lenders would do anything to recover debts. This may include nudging you to take another debt to repay what you owe them. While saddled with substantial debt, resist the temptation to take out a new loan. If a lender encourages you to take on new loans to repay them, beware! It might lead you into a debt cycle.
4. Unethical Collection Methods: Most predatory lenders are associated with unfair and abusive collection methods that involve threats, harassment, and debt-shaming to recover overdue debts. Always research lenders’ reputations and make inquiries about their debt collection methods. This will save you from huge embarrassment and protect your financial interests.
5. Promise Of No Credit Check: Your credit history indicates your ability to repay a loan. If a lender does not look at your credit score, they are not concerned with your ability to repay. Instead, they only care about what they can get from you.

Identifying predatory lending practices is easy once you understand their telltale signs, even if it means not being able to obtain the loan you seek for immediate relief. Don’t let a predatory lender trap you with a loan that may wreck your financial health.