Predatory lending | Loans and debt | Financial Literacy | Khan Academy

So let's talk a little bit about predatory lending. And as the word predatory seems to imply, it sounds like something that you wanna be very careful about how you engage in it. So generally speaking, a predatory lender is someone who is maybe using someone else's vulnerability to maybe take advantage of them. And it usually is in the form of there's some vulnerable group, let's say someone who is short on money, someone who's having trouble paying their bills, and one of these lenders might show up and say, hey, I know you're in a bind right now. I am here to help. I will lend you this money. And it can be very tempting for the person in need to borrow that money, but there's usually some very serious strings attached. One might be some hidden fees. A very common one is very high interest rates. So sometimes these loans might be tied to a future paycheck. Sometimes it might be based on your car's title. So if you don't pay it back, they're essentially going to get your car. And then they will charge you, they might say, okay, you just have to pay us back 10% in a week or 10% back in a month. And when someone's in a desperate situation, 10% in a month or in a week might not seem like a big deal, but when you think about it on an annual basis, they're actually paying hundreds of percent in interest, even in some cases as high as 1,000% interest. That's in a world where many folks who have access to better credit can get loans much lower than that. We're talking sub-10% loans, depending on what the interest rate environment is, is that where you might be able to get a loan at 6% or 7% or 8% while some of these predatory lenders might charge, as I just mentioned, 400%, 500%, 600% on an annual basis. Now, it's very easy sometimes to convince yourself that, well, I'm only going to need the loan for this week and I'm just going to pay the 10% back. But oftentimes, these lenders also make it very easy for you to roll the loan over because if you had to borrow money this week, what's going to change about your financial situation that when you have to pay that loan back that you're not going to have to borrow more money the week after? And so they actually try in certain cases to get people into these cycles so they have to keep rolling over the loans or maybe have to borrow more and more money. And so these loans do stay there for weeks or months. And so you are paying hundreds of percents over what you originally owed. So be on the lookout for this. Hopefully, you can go eyes wide open when you find yourself in a financial bind and some of these people come out of the woodwork. And then to be clear, there's a lot of folks who maybe are in between. They are legitimate lenders, but if you are not as good of a credit risk or you don't have assets to secure the loan by, so you don't have a car title or you don't have a house, because they're taking on more risk, they might charge higher interest rates. And so those might be interest rates that are more in the teens or 10, 12, 11, 15%, which is still very, very high interest. But I wouldn't necessarily call them necessarily predatory, but you still have to be careful about getting into some of those high interest loans as well.