Predatory lending can be defined as a practice where a lender uses aggressive sale tactics to lure a borrower into a loan that is characterized by inconsiderate and abusive terms.
This could take the form of above-market interest rates and general terms that bestows all power on the lender, leaving the borrower completely exposed.
In Kenya, many of such cases have taken a digital form and involve loans that aren’t affordable, have confusing or misleading terms, and come with unreasonably high fees.
The National Assembly is currently weighing up ways to regulate digital lending in Kenya through the Central Bank of Kenya( Amendment) Bill 2021.
In December 2020, Central Bank governor Patrick Njoroge - while addressing Parliament, revealed that CBK was actively pursuing ways to protect the public from predatory lenders.
“If passed, the CBK will regulate monthly interest rates charged by the digital mobile lenders,” he stated at the time.
His statement marked a culmination of a period in which millions of Kenyans have confessed to having fallen prey to unscrupulous lenders, leaving them in a debt trap.
It is important to note that the interest rate cap that came into force back in September 2016 (lifted in November 2019), arguably is seen to have led to the rise of predatory lenders in Kenya.
This is because the tough new laws meant to bring some sanity in the credit market created a ripple effect where borrowers (firms and individuals) considered high risk by lenders had to look for other avenues to access credit.
As a rule of thumb, before taking out any kind of loan, it is very important to make sure you can afford to repay it in full, under the stipulated repayment period.
However, it is important to know the various markers to look out for when it comes to identifying a predatory lender as detailed below.
These can be termed as red flags to look out for when looking to secure credit from any new lender.
Promises of no credit check
Think of it this way, would you be willing to lend your money to a total stranger without any sort of due diligence to determine if they are capable of paying you back in time? If your answer is no, then you might want to rethink borrowing from such a lender.
While a lender who seems disinterested in your credit history may seem godsend, it could also be a red flag that they may be into unfair/deceptive practices.
Hidden Product Packing
Often hidden in the fine print of potentially deceptive lenders, are products that the borrower did not sign up for when seeking a loan.
This is most often packaged as some form of insurance. The lender slaps the credit insurance charges on the borrower package with other services that the borrower did not necessarily agree to.
Before signing on any dotted lines, always make a point to go through all the fine print and ask for clarification on any areas that may seem unclear due to technical jargon.
Typically, when a borrower refinances a loan, they get a lower interest rate or monthly payment. That is the biggest incentive to refinance a loan.
A predatory lender will, however, encourage a borrower to refinance an existing loan into a bigger one with additional fees and higher interest rates. This is often termed as ‘loan flipping’.
Products offered by predatory lenders are intentionally designed to benefit the lender and could leave your financial health in the intensive care unit.
Early Payment Penalties
This has to be the crimson-red flags of warning signs when it comes to predatory lenders and how to go about sniffing them out.
They almost always attach high fees for instances where the borrower manages to pay off the loan early.
This plays a contributory role in some borrowers being stuck in a perpetual debt cycle.
Bait & Switch interest rates
This starts off with a very lucrative interest rate (the bait) splashed out in advertisements to lure you in for the kill.
However, once you sign up and make your application, the predatory lender goes ahead to inform you that you do not qualify for the advertised loan, then serves up a higher interest one (the switch).
They eventually end up convincing you (the borrower) to sign up for the second option and work your way towards the ‘juicy’ loan that reels potential targets into the fold.
Such lenders are also very aggressive in their sales tactics, usually creating a ‘now or never’ scenario.
The aim is to deny one of the crucial time needed to think through the loan offer and give it careful consideration. They push you to sign up right away, often before you have a chance to come to grips with the loan agreement's terms.
To protect yourself from predatory lenders, make it a habit to compare loan terms between multiple lenders any time you are looking for a loan.
This will help you identify terms that appear troublesome and potential red flags. Experts advise loan seekers to work with lenders that best fit their financial plans and capabilities.
It is very important to know your personal financial situation in order to avoid loans with excessive interest rates.
The better you understand your ability to repay any loan, the less likely you are to be talked into a loan that is designed to chain you from the very start.