Predatory lenders get borrowers to agree to unfair or abusive loan terms. You can avoid getting into this situation by knowing common predatory practices and learning how to spot them when you’re shopping for a loan. If you or a loved one has been a victim of predatory lending, you can get an attorney to help you understand your options.
Written by Attorney Eric Hansen.
Updated November 17, 2021
You want the best in life. This is especially true when you’ve been working hard and saving for a big purchase like a house or a car. If you’re financing that big purchase, you’ll inevitably want the best loan available to you. Having favorable terms like a low interest rate, no prepayment penalties, minimal fees, and a manageable monthly payment is very helpful when it comes to your budget, your financial well-being, and your peace of mind.
Sometimes people are told that the prospective terms on a loan are the best they’re going to get — especially with their credit history. That could very well be true, but it pays to look into it further so you don’t get trapped in a predatory lending situation. This article will discuss predatory lending and how to protect yourself so you aren’t taken advantage of when financing a big purchase.
What Is Predatory Lending?
Unfortunately, predatory lending is relatively common. It’s the practice lenders use to get borrowers to agree to unfair and abusive loan terms. These terms could include a very high interest rate, hidden fees, inflated appraisal values and loan amounts, balloon payments, disclaimers, and other unfair and deceptive terms and conditions.
Predatory lending practices occur frequently with secured loans. These loans are backed by collateral like an automobile or a house. Collateral-backed loans are considered predatory if the borrower ends up paying too much for the loan, losing equity in the property that secures the loan, and losing the secured property altogether by defaulting on the loan. The lender is then able to profit through repossession or foreclosure and the subsequent sale of the property. If a lender profits greatly and is incentivized to make it easier for a borrower to default, it could be a predatory loan.
Predatory lending happens fairly frequently in payday and overdraft loans and credit cards, where the interest rates are excessively high. Predatory lenders are trying to capitalize on desperation and a take-it-or-leave-it approach, which is why dishonest lenders often target homeowners with bad credit or those with lower or fixed incomes. Predatory lenders also target the elderly, racial minorities, and women at a higher rate. That said, anyone can be the victim of predatory lending.
Thankfully, many state and federal laws protect consumers. One of the most well-known is the Truth in Lending Act. Consumer protection agencies and each state’s attorney general will take on and punish predatory lenders.
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Common Predatory Practices: Loan Flipping and Packing
There are many common predatory lending practices, but two of the most frequent ones that affect consumers are the practices called loan flipping and loan packing.
Loan flipping is when a lender convinces a borrower to refinance with a bigger loan with a longer term and higher interest rates and fees than their previous loan. For example, if you’re looking to lower your monthly mortgage payment through refinancing, you could end up with a refinanced mortgage that has a much higher interest rate and additional service charges.
Another common predatory practice is loan packing. Loan packing happens when a lender adds completely unnecessary financial or insurance products onto the loan. One of the most common examples of loan packing is when a mortgage lender adds credit insurance to your home loan to pay the loan off if you die. This additional cost isn’t necessary but happens frequently when a predatory lender is involved.
Protect Yourself from Predatory Lending Practices
There are a lot of things you can do to protect yourself from predatory loans. Essentially, you’ll want to comparison shop for loans, be aware of red flags, and get everything in writing.
Comparison Shop for Loans
When you’re making a big purchase, you’ll want to look around and do some comparison shopping to find the best deal. Predatory lenders are banking on you believing that you won’t qualify for many loans and that you’ll take any loan you’re approved for no matter the terms. They’ll try to get you to accept their loan fast, without scrutinizing it. They don’t want you looking around and getting a better deal from a bank down the street. But the truth is, even if your credit is damaged, you can get approved for a loan and will be offered different terms from different lenders.
To get a better sense of where your credit is at and what loans you’ll qualify for, you can pull your credit report. Then have it reviewed by a neutral third party like a financial counselor to get a better idea if the lender is being deceptive about the type of loan and the terms you’ll qualify for.
Watch Out for Misrepresentations & Look at the Terms
Be on high alert for the red flags of predatory lending. Look for misrepresentations like the lender stating the loan has the flexibility of an open line of credit or that they require credit insurance. Ask for the lender’s published rates of fees and interest rates.
Also, review the loan thoroughly before you sign it. Predatory lenders will probably use high-pressure sales tactics to get you to sign quickly. Don’t fall for it. Take your time. Look for terms and conditions that are restrictive and that will trap you in the loan. A prepayment clause, one that is there to keep borrowers from refinancing, is a telltale sign of a predatory loan.
Get Asset-Based Loan Effects in Writing
As a rule in lending, get everything in writing. You’ll want to get a written explanation of how a loan could affect your equity in the asset if the loan is “asset-based.”
Predatory lenders use unfair and deceptive practices to target borrowers with credit issues or those with fixed or low incomes. These lenders profit by preying on desperation and count on you to be unaware that you have other lending options.
There are several tell-tale signs of predatory lending you should look out for when loan shopping. But if you are still unsure, seek legal advice from a consumer protection attorney when applying for a loan. Otherwise, if you think you’ve been taken advantage of by a predatory lender or if a loved one has been the victim of predatory lending, you should talk to an attorney. Many offer free consultations, and they’ll be familiar with the state and federal laws in place to protect you.