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Beware of the Predatory Lenders People can get deep in debt when they take out a loan against their paycheck. They write a postdated check in exchange for money. When they get paid again, they repay the loan, thus the name payday loan. These loans generally come with very high, double-digit interest rates. Borrowers who cannot repay the money are charged additional fees for an extension, which puts them even deeper in debt. Borrowers can continue to pay fees to extend the loan's due date indefinitely, only to find they are getting deeper in debt because of the steep interest payments and fees.

Predatory lenders often target elderly and low-income people they contact by phone, mail or in person. Take for example the case of Pauline who at 73-year-old got plenty of solicitations from finance companies after her husband passed away. She was struggling to make ends meet on her fixed income. To pay off her bills, she took out a $5,000 home equity loan that carried a high interest rate and excessive fees. Soon she found she was even deeper in debt, so she refinanced the loan once, then again, and again, paying fees each time.

Pauline's children discovered her situation and paid off the loan.

The lessons here are:
  • Do not borrow from Peter to pay Paul.
  • Never respond to a solicitation that makes borrowing sound easy and cheap.
  • Always read the fine print on any loan application. Seek assistance from family members, local credit counseling services or others to make sure a loan is right for you.

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