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Predatory Loans
For most students attending college, taking out a loan is just one more step in the process of the journey of higher education.
As awareness about the student debt crisis continues to spread, Americans are becoming more and more risk-averse to taking out loans. In reality, a lot of the loans you can take out as a prospective college student are reasonable to pay back so long as you understand how interest rates work and the timeline you might need. Still, though, there are lots of predatory lending practices that are designed to trap you into paying off loans for the rest of you life.
There are a few good ways to look out for a predatory student loan, we can give you some easy red flags to look for as you move through the process. When looking for a place to take a loan from, be wary of any outfit that is too difficult to get a hold of. If you are contacting a loan services organization and the wait times are long or it feels like you are being pressured into taking a loan out, you should immediately find a different place to go.
Another important step in taking out loans is asking about the “fixed” and “variable” interest rates, and being sure that you understand what you are agreeing to. As the names imply, fixed interest rates remain the same over time while variable or “floating” interest rates change. Often, variable interest rates start lower and entice borrowers to choose that option, but over time they end up costing borrowers a lot more money, as variable interest rates have been rising for years now. You’ll want to find a place that is offering fixed rates, but also be sure they are explicit about what kind of interest rate you’re getting. A typical interest rate ranges between four and seven percent — anything outside that spectrum should catch your attention.
Loan services are also supposed to tell you exactly when a payment has been made and how much more you have to pay off. One common deceptive tactic shady loan services use is that they will not properly file a payment on time and then add in late fees after the fact. This deceptive move has been responsible for millions of dollars of late fee payments that are only now being sorted out and punished by the federal government. Keep your eye out for vague fees and costs that aren’t explicitly associated with the loan money you owe.
““I recommend reviewing your loan accounts once a month to ensure that your payments have been applied accurately.”
- Danetha Doe, Financial Expert”
Finally, there are a few tell-tale signs you are being duped into a dangerous loan. If the timeframe to get the loan feels really fast, then it’s probably something sketchy. Predatory lenders will push you into signing a loan as quickly as possible before you can do any additional research; legitimate lenders will make sure you understand what you’re getting yourself into. Extremely low or high-interest rates outside the four to seven percent range are also a sign that you are getting mixed up with a dangerous lender. And, of course, if a lender ever asks you to secure a loan with something like a house or car, be sure to take the commitment seriously. You need to know you can pay that loan back, or else you will lose that valuable collateral. That’s usually a sign they are giving you a loan they don’t expect you to be able to pay back, and then they can legally take whatever asset you used to back up the loan.
All told, the best guidance for being safe with loans is following your gut. If something doesn’t make sense, feels too good to be true, or gives you nervous pause, just find somewhere else to get your money. There are plenty of lenders out there. Find the one that’s right for you.
Additional Resources:
Consumer Financial Protection Bureau