Back in 2008, Jeffrey Penn took out a “payday loan.”
Nothing crazy. Just $500 to see him through the month until his next payday.
At the time, his wife, Cheryl, had lost her job and they were having a little trouble adjusting to the lower income.
“We had kids in school… a mortgage to pay… and a family to feed,” says Jeffrey. “I couldn’t just stop paying for those things.”
Jeffrey wasn’t overly worried about repaying the loan.
After all, he was confident that he could pay it back the next time he got paid. And even if he couldn’t, the money lenders said they could offer him a “very manageable” repayment plan — just two $95 payments a month.
To Jeffrey, it seemed like a great deal… but something more sinister lurked in the fine print of the contract.
“If you miss a payment, you start racking up these crazy fees. I’m talking hundreds and then thousands of dollars,” says Jeffrey. “The interest was crazy. And the loan was backed by our home. So they said they could sell our home if we weren’t paying.
“We started taking out new loans to help pay off the old ones. Folks can call me stupid. But the truth is we didn’t have a choice.”
Over the course of the next six months Jeffrey and Cheryl took out four more $500 loans. This is what’s known in the predatory lending business as a “Cycle of Borrowing.”
Folks who can’t afford to pay their loans borrow more money to avoid missing payments. But of course, every additional loan only pushes your repayments higher. This just makes it more likely that you’ll need to take out another loan to avoid missing a repayment.
In the end, Jeffrey ended up borrowing just $2,500… but it almost cost the Penns everything they owned.
With five separate loans on the go, those twice-monthly payments of $95 ballooned to $950 a month. What’s more, the vast majority of that money wasn’t going toward the loan’s principal. It was mostly just paying off the loan’s sky-high interest.
Over the next six years, Jeffrey and Cheryl paid more than $50,000 in interest for the $2,500 they borrowed.
That’s right. The Penns ended up paying 20 times their initial loan in interest.
“By the time we paid off the loan we had already lost our cars and our home,” says Jeffrey. “They’re criminals. No better than mob loan sharks.”
It sounds unbelievable. But this wasn’t an isolated incident or a case of one bad money lender.
In fact, predatory lending, as it’s now known, is a multibillion-dollar industry… and one of the greatest threats to the finances of working-class Americans.
Deceitful money lenders are actively targeting folks with bad credit… who urgently need money… and trapping them into exploitative, one-sided contracts with interest rates as high as 300% or even 1,000%.
Well, you might say that it’s the borrower’s own fault for taking out the loan in the first place. But predatory loans are structured in a way that takes advantage of a borrower’s lack of understanding about loans, terms or finances.
Brightly colored ads on TV and online will tell you these loans are “easy, fast and secure.”
But in the fine print you’ll find details that describe hidden fees, sky-high interest rates and even clauses that hinder your ability to pay off your debt — thus keeping you on the line for longer and for more money.
Many folks — who might otherwise check the fine print — are reassured by the promise of “no hidden fees.”
Except, legally speaking, any details in the fine print aren’t technically “hidden fees.” After all, they’re there in the fine print for everyone to read.
This is one of the most common techniques they use to mislead borrowers about the true price of the loan.
Another sly tactic is to leave part of the contract blank when you’re signing it. After you’ve signed it and left, they can fill it in with whatever they want. This is why you never sign a contract with blank spaces in it.
But maybe the worst strategy abused by lenders is to simply encourage you to borrow more money than you need.
They’ll offer you this extra money in return for backing up your loan with your home equity. So when you inevitably default on your loan, they’ll simply foreclose on your home and sell it to pay off your debt.
And that’s exactly what happened to Jeffrey and Cheryl.
Tomorrow, we’re going to discuss how to spot a predatory loan from a mile off and keep yourself from getting scammed by these loan sharks.
Until then, if you any questions, ideas or a predatory loan story of your own, click here to email me. I’d love to hear from you.
All the best,
Editor, Money & Crisis