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What are the Different Types of Illegal Loans?

Mary McMahon
Updated May 16, 2024
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Illegal loans can include loans with illegal contract clauses and loans extended under fraudulent circumstances. Laws pertaining to lending vary widely by jurisdiction, and the legality of a loan can vary, depending on where it originates. If an investigation uncovers illegal loans, penalties can include fines, jail time, and removal of professional certifications and licenses.

Illegal contract clauses can include a variety of things. Many nations cap interest rates and a loan with an interest rate over the limit is considered illegal. Other illegal loans may involve extortionate clauses or the use of illegal property as collateral. People cannot back a loan with something they are not legally allowed to have. Laws about lending practices may also have restrictions to address issues like down payments and deposits, such as a requirement that the borrower have legal title to these funds. Lenders who overlook origins of down payments and collateral may be entering illegal loan contracts.

Fraudulent circumstances can also make a loan illegal. If lenders or borrowers lie about key factual material, as for example when someone uses identity theft to obtain a loan, the loan is illegal. Lenders are expected to use due diligence to detect fraud and they are liable if they fail to do so. Borrowers subjected to fraudulent circumstances by lenders can sue for damages if these are later uncovered. For example, a borrower encouraged to lie to get a loan by an unscrupulous lender would be involved in a fraudulent loan.

A number of measures are used to identify and address illegal loans. Lenders are required to keep detailed records and can be subject to investigation by government regulators. Regulators can also fine lenders for activities like issuing false statements in advertising and promotional materials. If a lender determines that a borrower obtained a loan with fraudulent techniques, the borrower can potentially be taken to civil court to recover damages and the case may be criminal, depending on the circumstances.

Some lending tactics are unscrupulous, but not illegal. High interest rates are legal as long as they are within the law, as are things like loans without down payments. Predatory lending practices where lenders seek out vulnerable borrowers with enticing loan terms are not necessarily illegal, depending on how the lender behaves. If a lender does not provide financial disclosures, this would be a violation of the law. Likewise with lenders who pressure borrowers to sign paperwork without reviewing it or who falsify information. Providers of such loans are usually careful to stay within the law.

MyLawQuestions is dedicated to providing accurate and trustworthy information. We carefully select reputable sources and employ a rigorous fact-checking process to maintain the highest standards. To learn more about our commitment to accuracy, read our editorial process.
Mary McMahon
By Mary McMahon

Ever since she began contributing to the site several years ago, Mary has embraced the exciting challenge of being a MyLawQuestions researcher and writer. Mary has a liberal arts degree from Goddard College and spends her free time reading, cooking, and exploring the great outdoors.

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Mary McMahon
Mary McMahon

Ever since she began contributing to the site several years ago, Mary has embraced the exciting challenge of being a...

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