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

So let's talk a little bit about predatory lending. As the word "predatory" seems to imply, it sounds like something that you want to be very careful about how you engage in it.

Generally speaking, a predatory lender is someone who is maybe using someone else's vulnerability to maybe take advantage of them. 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. 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."

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. 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.

They might say, "Okay, you just have to pay us back 10% in a week or 10% back in a month." 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 a thousand percent 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 six, seven, or eight percent, while some of these predatory lenders might charge, as I just mentioned, 400%, 500%, or 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. If you had to borrow money this week, what's going to change about your financial situation when you have to pay that loan back that you're not going to have to borrow more money the week after?

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. These loans do stay there for weeks or months, and so you are paying hundreds of percent over what you originally owed.

So be on the lookout for this. Hopefully, you can go in eyes wide open when you find yourself in a financial bind. Some of these people come out of the woodwork.

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—like 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.

Those might be interest rates that are more in the teens—like 10%, 12%, 11%, or 15%—which is still very, very high interest, but I wouldn't necessarily call them predatory. You still have to be careful about getting into some of those high-interest loans as well.