The practice of predatory lending has become a commonality in the mortgage industry today. This practice is defined as any unfair action or deceptive tactic that a lender uses to take advantage of a borrower’s lack of understanding about loans, terms, or finances and creates loan terms that greatly benefit the lender at the expense of the borrower. Much like a predator feeds on smaller animals as its prey, the practice of predatory lending focuses
Predatory lenders typically target minorities, the poor, the elderly, and the less-educated. These lenders also prey on people who don’t have anywhere else to turn to and are desperate to obtain immediate cash for emergencies such as medical bills, home repair, or student payments. Most of their clientele are people who have poor credit and have difficulty obtaining conventional loans or lines of credit.
The Dangers of Predatory Lending
Lenders are the primary beneficiaries when it comes to predatory lending and they ignore or hinder the borrower’s ability to repay the debt. These lending tactics take advantage of borrowers. Classic techniques are centered on home mortgages because home loans are backed by a borrower’s real property, which allows them to gain profit from unreasonable loan terms or acquire the home upon foreclosure. Newer forms have surfaced recently such as the Uber predatory lending scandal.
Common Warning Signs
` There are many anti-predatory lending laws in place for each state. These laws are aimed at decreasing these occurrences and protecting the borrowers. However, even with these laws in place, there are still people to succumb to these practices mainly because of the craftiness of the lending institutions and the gullibility or level of desperation of the borrowers. For this reason, we have come up with the most common warning signs you can watch out for to avoid succumbing to predatory lenders and their schemes.
- The offer sounds too good to be true.
During your search for a loan, you may come across ads from companies promising you to fix your damaged credit, settle your debts for less than you owe, or give you a loan with low interest despite low credit scores. These offers sound too good to be true. Be sure to inspect the contract and look for the catch before signing the agreement. These terms may include high fees for convenience and speed of service, which could trap you in a cycle of debt.
- Check out the true cost of the product.
If the lender doesn’t explicitly tell you the true cost of the product or makes it hard for you to know how much the loan will cost, then it’s best you should stay away from that company. A consumer-focused lender will be transparent about the cost of the loan. You can easily find the cost of a loan when you look at the financial products under a reputable lender, which will include all fees such as the APR, penalties for late payments, and other charges.
- Your ability to repay doesn’t matter.
Reputable lenders will always inspect a potential client’s credit history because they will want to assess how you’ve handled debt in the past and your ability to repay the loan. A lender that forgoes this check before offering you a loan does not assess how you will be able to handle the debt and its potential impact. However, they will make up for the risk with charging high rates with high upfront fees in return for the loan.
- You do not have an opportunity to build credit.
Good lenders will give you the opportunity to build your credit and provide you with an opportunity to increase your credit score by reporting your on-time loan payments to one or more of the three primary credit bureaus. By doing this, you can get cheaper financial products in the future. Steer clear of the companies that will not give you the opportunity to improve your standing in the future.
- The lender requires electronic payments.
A good lender will not demand access to your bank account to collect payments under the guise of convenience and will not treat your account like an ATM. Most predatory lenders make repeated payment requests while you rack up bank overdraft fees, especially if your account is short.
- Many others have complained about the lender.
This should be the biggest red flag of all. Do your homework and check customer reviews from online databases. You can look for the lender’s name and customer reviews at the Better Business Bureau for complaints. Scam lenders will also be found on the Federal Trade Commission’s Scam Alerts. The lender’s name will also show up on the Consumer Financial Protection Bureau’s complaints database if they have been reported in the past.
.