What is a payday loan and other types of predatory lending?

Financial watchdog groups have raised concerns about predatory lenders taking advantage of low-income Americans in need of quick cash as soaring inflation squeezes consumers.

So, what is a predatory loan?

Predatory lending imposes unfair or abusive loan terms on borrowers, including triple-digit interest rates and narrow time windows for repayment. Meanwhile, a “fair” loan guarantees the same lending opportunities to all consumers, including low-cost loans for those with good credit scores, according to federal guidelines. 

A predatory lender also may persuade a borrower to accept unfair terms through deceptive, coercive, exploitative or unscrupulous actions, according to Orlando-based debt.org, an online site that gives advice from financial experts. One example is lenders who target borrowers with credit problems or who have recently lost their jobs.

Predatory lending practices also can include fraudulent, deceptive and unfair tactics lenders use to “dupe” consumers into loans they can’t afford, according to the U.S. Attorney’s Office of Eastern Pennsylvania, which cites high mortgage costs as contributing to borrowers who can’t keep their homes in good repair. 

A person rides a scooter past a check cashing and payday loans store on March 11, 2022, in downtown Los Angeles.
A person rides a scooter past a check cashing and payday loans store on March 11, 2022, in downtown Los Angeles.
PATRICK T. FALLON/AFP via Getty Images

The Center for Responsible Lending, a North Carolina-based nonprofit research organization that works to end predatory lending, released a study in late September that examined the “persistent harms of high-cost installment loans,” a form of predatory lending that includes “rent-a-bank” loans. The group says it found predatory loans had a greater impact on people of color and people with low incomes.

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