It is common for individuals to take out new loans to repay older debts. In some cases, this might help them keep their debt under control.
Unfortunately, some of these loans might target people in financially vulnerable positions and increase the risk of debt in the long run. Regardless of whether or not individuals wish to pursue debt relief through bankruptcy, every New Mexican should be aware of the risks predatory loans pose to their financial health.
What are predatory loans?
Loans are not inherently predatory.
Generally, predatory loans are loans with unfair terms that benefit the lender and cost the borrower much more than they should. The lender convinces the borrower – often under false pretenses – to take on a loan with extremely high interest rates or fees.
For example, payday loans are often considered to be predatory in some cases, since:
- Lenders often target low-income families;
- The loans often carry high interest rates;
- Lenders may take automatic payments from someone’s bank account; and
- The loans may require back-dated checks.
In 2017, New Mexico lawmakers passed a law to strictly regulate and eliminate predatory lending within the state. Several federal laws also protect individuals from predatory lending practices.
You should still know the warning signs of a predatory loan
Even though predatory lending is generally illegal, many small lending agencies might still attempt to target vulnerable individuals. Some of the common warning signs that a lender might be predatory include:
- The loan has excessive interest rates and fees attached;
- The actual cost of the loan is unclear;
- The lender does not check the individual’s ability to repay the loan; and
- The lender avoids answering any questions about the loan.
This is why individuals should take great care to research lenders and understand their legal rights before taking out a loan.
Bankruptcy can help you handle the threat of predatory loans
Filing Chapter 7 bankruptcy can help individuals wipe out most of their unsecured loans. This often includes many types of predatory loans.
However, individuals must be careful if they are considering bankruptcy. Some loans, like payday loans, can be tricky to manage when they have back-dated checks. And gaining more debt just before filing could delay a bankruptcy. It might be beneficial to speak with a bankruptcy attorney before filing to understand all of the options available.