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Source: The College Investor
The peak season for new student loans is during the summer months of June, July and August. Usurious loans can be a problem for some borrowers year-round.
What exactly is usury? How can borrowers protect themselves from usury? We answer these and other questions in this short guide.
Definition of predatory loans
The term “usurious lending” is not clearly defined. Many borrowers use it to refer to loans with terms they do not like. However, the FDIC defines it as “the imposition of unfair and abusive loan terms on borrowers.” Common examples include payday loans and auto pawn loans.
Characteristics of usurious loans
The FDIC identifies several characteristics of usury, including:
Some of these features apply to student loans, and others do not. For example, there are no prepayment penalties by law for federal and private student loans. However, families borrowing money to finance their education may come across loans that have nothing to do with education financing.
Other characteristics of usurious loans include:
Some of these features are common to both federal and private student loans. As a result, even legitimate loans are not perfect. Additionally, federal student loans are not subject to the minority defense or statute of limitations.
Traditional students are provided with both federal and private student loans, and some lack the financial experience to fully understand the consequences of taking out loans to finance their education.
How to protect yourself from usury
Here are four steps you can take to protect yourself from unfair loan terms.
1. Consider alternatives to borrowing
Apply for grants and scholarships that do not have to be repaid. Consider installment plans, which spread the cost of tuition over less than a year and do not accrue interest. You may also want to look for a part-time job to earn some money to help with tuition.
Borrow as little as you need, not as much as you can. The idea is to live like a student while you're in college so you don't have to live like a student after you graduate.
2. Borrow federal funds first
Federal student loans have low fixed interest rates and flexible repayment terms. They also offer a number of benefits (some of which private loans cannot match), including government deferments and payment deferrals, death and disability relief, income-based repayment, and debt forgiveness options.
3. Check your credit score before applying for a personal loan
You can check your credit reports for free at AnnualCreditReport.com. Errors can affect your credit score and the interest rate you'll pay if you get a loan. Correct any errors by disputing them.
Do this at least 30 days before applying for a private student loan, as it can take a month for errors to be removed from your credit report.
4. Compare prices when looking for a loan
Most borrowers focus on finding the cheapest loan, and that's a good place to start. But other terms that may be of interest include the quality of customer service (e.g., does the lender offer call center hours in the evenings and on weekends) and the availability of loan discounts (e.g., autopay discounts, discounts for good grades, college grad discounts).
When comparing student loans, borrowers should consider both the monthly loan payments and the total payments over the life of the loan. A lower monthly loan payment may mean paying significantly more over the life of the loan.
The APR of a loan is made up of the effects of the interest rate, loan fees and repayment period. A higher APR means a more expensive loan. Borrowers should be more cautious when a loan's APR is in the double digits. For example, an interest rate of 16% with a repayment period of 10 years means the borrower will have to pay more interest than the amount borrowed. With a repayment period of 20 years, an interest rate of 8% or more means they will have to pay back more than double the amount borrowed.
Another bad sign is when a loan requires a repayment period of more than 10 years to make the monthly loan payments affordable. This is generally a sign that you have borrowed too much or that the loan is too expensive.
Final thoughts
Ultimately, the best way to protect yourself from loan sharks is to be financially literate. This will help you understand how interest rates, fees and loans work and help you make smarter lending decisions.
Be sure to read The College Investor's student loan guide. Your school may also offer free courses to teach you how to pay for college in a financially responsible way. Finally, MyMoney.gov is home to a wealth of financial tools like calculators, budget worksheets, and planning checklists.
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