What is Predatory Lending?
Predatory lending is the unfair, unscrupulous and misleading practices of some lending companies when you ask them for a loan. In the United States, there is no legal description of what a predatory lending practice is but the FDIC generally classifies any lending that passes on offensive and inequitable loan conditions to a borrower as predatory.
The term is used to describes any practice that convinces a borrower to consent to a loan that has terms that exploit and unjustly profit the lender at the expense of the borrower. These shady lenders usually try to exploit a borrower’s ignorance of loans, terms and financial conditions.
Predatory lenders typically target minorities, poor people, the elderly and the semi-educated. They additionally go after individuals who require quick money for a crises, for example, emergency expenses, making a home repair or auto installment. These moneylenders likewise target borrowers with credit situations or individuals recently got laid off. This could prohibit them from normal mortgages or credit extensions, even though they have plenty of home equity.
Legally, the methods used by predatory lenders are not outright criminal but they almost always leave their victims with bad credit, facing bankruptcy and loss of their homes.
Common Predatory Lending Practices
Most Predatory Loans have been identified as likely leading to the borrower’s ruin. Most practices are disputed whether they are predatory or not but the truth is that when a lending practice creates a minefield where in most instances, paying back without problems is unlikely, it can be cited as predatory. Here are some common examples of Predatory Lending:
- Payday loans: A payday loan is a kind of a borrowing where an individual borrows a little sum at a high rate of interest in a short-term. The borrower writes a postdated check in the amount they want to borrow in addition to a charge in exchange for money. This is one of the most common forms of predatory lending besides subprime mortgages because you end up paying almost double the amount of the loan collected as interest.
- Deceptive disclosures: This is when the lender does not present the true picture of the cost, risks and conditions of a loan. Sometimes, the lender also inserts ambiguous clauses that allow them to change the terms of the loan after the customer has signed an agreement.
- Risk-based loan pricing: When a loan takes advantage of a borrower’s credit to impose excessive interest rates that are very likely to default on payment, it can be termed as predatory. Simply put, the worse your credit score, the higher the risk you present and the higher the interest rate you are charged.
- Hidden and inflated fees and charges: When loan origination charges are priced higher than normal and irregular fees and charges are tacked on to the cost of the loan, it is predatory. Usually predatory lenders hide most of these charges in the small print and never disclose until it is too late. Hence, the loan ends up costing more than normal for the borrower.
- Asset-based lending: This is when a lender enables borrowers to take a higher loan amount than they can pay based on their home equity amount instead of their current ability to make regular payments.
- Loan flipping: Some lenders incentivize borrowers to refinance their current loan facilities with a bigger one and then offer it with a stack of processing charges and usually a higher interest rate than the previous loan.
Protect Yourself from Predatory Lenders
As we said before, most predatory lending practices are downright immoral but hardly proven to be illegal or criminal by law. The most effective form of prevention from falling victim to a predatory lender is education. Here are some ways to ensure that you do not find yourself in this situation
- Educate yourself: You should try to figure out how loan interest rates work on your own. Learn from simple online tutorials and practice with online calculators that help tell you the real figures behind a proposed loan and explain its implications for you.
- Learn what state laws has to protect you: A lot of states now have their own laws that try to prevent residents from being taken advantage of with real estate loans and payday loans. If you find yourself locked into a predatory loan, your state government may be able to provide you with a way out.
- Research your potential lender: The internet is a great source of information about any lender that you are looking to borrow from. Check out online reviews and speak to people that have borrowed from them, you are likely to find out if they have been acting inappropriately
- Be cautious of incredibly low interest rates and juicy deals: Most times, you don’t even qualify for these advertised bumper rates or you are given a low rate that will progressively increase over time. You are most likely a signature away from getting into a balloon loan that is bottom heavy in huge repayments after a short while. Not all that glitters are gold.
- Avoid signing blank or incomplete documents: Never ever sign on any loan applications or any document which binds you to an agreement without making sure it is complete with all the information needed. This is just common sense because the next time it comes back, it is probably completed with terms that favor only the lender.
- Never agree to lie on a loan application. Even if your lender says it’s okay and everyone does it, remember that it is most likely going to affect you in the future and you have probably waived your right to legal recourse as you knowingly committed perjury. You might end up losing your money and ending up in legal trouble as an unwanted bonus.
Final Note
Even though there are more laws being made against predatory loans in a lot of states, there are still a lot of predatory lenders out there. Don’t think you have legal solutions if you get trapped because these practices are borderline and hard to prove as illegal in court. Be smart and protect yourself. If you are already in a loan that could be considered “predatory”, contact a financial advisor to help you with a debt consolidation plan and other solutions available to you.
