The Predatory Lending Traps

Predatory Lending sounds like something heinous and it should especially if you are the one getting the loan. Predatory lending benefits the lender and ignores or obstructs the borrower’s ability to repay the debt. These lending tactics often try to take advantage of a borrower’s lack of understanding about loans, terms or finances.

Predatory lenders typically target minorities, the poor, the elderly and the less educated. They target people who need immediate cash for emergencies such as paying medical bills, making a home repair, car payment or rent. These lenders also target borrowers with credit problems or people who recently lost their jobs. They focus on victims who would normally be disqualified them from conventional loans or lines of credit.

Most of us are aware of, predatory lending practices that included home mortgages. Since home loans are backed by a borrower’s real property, a predatory lender can profit from loan terms stacked in his or her favor and from the sale of a foreclosed home, if a borrower defaults.

While the practices of predatory lenders may not always be illegal, they often leave those who use them with ruined credit, and stuck with an incredible amount of debt. Many commonly used forms of predatory loans such as payday loans, car title loans, car loans, tax refund anticipation loans focus solely in lower income targets.

Predatory Lending Practices

What makes a loan predatory a few indicators will exist such as failure to disclose information or disclosing false information, risk-based pricing and inflated charges and fees.

These practices, either individually or in concert with each other, create a cycle of debt that causes severe financial hardship on families and individuals. A cycle that families may never be able to get out of.

HERE ARE SOME SPECIFICS

Inadequate or False Disclosure

The lender hides or misrepresents the true costs, risks and/or appropriateness of a loan’s terms, or the lender changes the loan terms after the initial offer.

Risk-Based Pricing

Lenders charge very high interest rates to high-risk borrowers who they know are most likely to default.

Inflated Fees and Charges

Fees and costs (e.g., appraisals, closing costs, document preparation fees) are much higher than those charged by reputable lenders, and are often hidden in fine print. Many borrowers never even know they are paying more.

Loan Packing

Unnecessary products like credit insurance — which pays off the loan if a homebuyer dies — are added into the cost of a loan.

Loan Flipping

The lender encourages a borrower to refinance an existing loan into a larger one resulting is a higher interest rate and additional fees.

Asset-Based Lending

Borrowers are encouraged to borrow more than they should when a lender offers a refinance loan based on their amount of home equity, rather than on their income or ability to repay.

Reverse Redlining

The lender targets limited-resource neighborhoods that conventional banks may shy away from. Everyone in the neighborhood is charged higher rates to borrow money, regardless of credit history, income or ability to repay.

Balloon Mortgages

A borrower is convinced to refinance a mortgage with one that has lower payments upfront but excessive (balloon) payments later in the loan term. When the balloon payments cannot be met, the lender helps to refinance again with another high-interest, high-fee loan.

Negative Amortization

This occurs when a monthly loan payment is too small to cover even the interest, which gets added to the unpaid balance. It can result in a borrower owing substantially more than the original amount borrowed.

Abnormal Prepayment Penalties

A borrower who tries to refinance a home loan with one that offers better terms can be assessed an abusive prepayment penalty for paying off the original loan early. Up to 80% of subprime mortgages have abnormally high prepayment penalties.

Mandatory Arbitration

The lender adds language to a loan contract making it illegal for a borrower to take future legal action for fraud or misrepresentation of their lending practices.

Loan Churning

Loan churning is where borrowers are forced into a relentless loan cycle in which they are constantly paying fees and interest, without noticeably reducing the principal amount owed on the loan.

Loan churning usually works like this: The lender makes a loan the borrower can’t afford. The borrower fails to pay the loan back on time, so the lender offers a new loan that includes another set of fees and interest. The borrower, already under stress for not repaying the first loan, agrees to the second loan and the loan-cycle churn has started.

Prepayment Penalties

Another practice among predatory lenders is to include a prepayment penalty on loan agreements, especially those involving subprime mortgages or car loans.

So when you are in a bind, make sure you protect yourself . If you make the choice to get a loan, make sure you can afford to pay it back.