Some unscrupulous lenders use abusive practices, known as predatory lending, to trap borrowers in loans they can’t afford. Those lenders target vulnerable groups, make misleading claims and conceal the true cost of their loans.
Types of Predatory Lending
It’s legal for lenders to charge borrowers with bad credit high interest rates since they’re riskier than customers with good credit. Predatory lenders deliberately target people with bad credit and charge them exorbitant interest rates.
Redlining is the illegal practice of denying loans to residents of low-income or minority neighborhoods. Reverse redlining means predatory lenders aggressively push unaffordable loans on residents of those areas.
A bait and switch is when a lender approves a borrower for one type of loan, then changes the terms without adequately disclosing future changes up front.
Asset-based lending is a practice in which a lender offers a customer with assets, such as home equity, a large loan that they know the borrower can’t afford. A borrower who defaults can lose those assets.
A balloon loan has small payments at the beginning, then a large payment for the remaining balance due. Those loans can be legitimate, but predatory lenders don’t clearly explain the terms to borrowers.
A negative amortization loan has payments that don’t cover the interest due or any of the principal. Borrowers make payments each month, but their balances keep growing.
Loan flipping is taking out a new loan to refinance an unaffordable loan. Predatory lenders often set up customers so they move from one unaffordable loan to another while the lender keeps collecting fees.
Loan packing means a lender tacks on fees for services the borrower doesn’t need or want. Those services may be legitimate, but predatory lenders may tell customers they are required, even though they’re optional.
Legitimate lenders often charge prepayment penalties to discourage borrowers from paying off loans early. Predatory lenders may charge exorbitant prepayment fees to discourage refinancing.
How to Spot a Predatory Lender
Several laws are designed to protect consumers from predatory lending, but they aren’t always strongly enforced. That means you need to be on the lookout.
Get quotes from several lenders. Verify that they’re licensed in your state, check their Better Business Bureau ratings and read reviews.
Make sure you understand all the loan terms, including the fees, interest rate and monthly payments, and how any of those terms could change in the future. If a lender won’t provide those details up front and in writing, don’t sign a loan agreement.
A lender that doesn’t check your credit should raise a red flag. The company doesn’t care if you can afford to repay a loan because it can get money through high interest rates and fees or take your car or home if you default.
Don’t sign a contract with blank spaces. Someone could add other information later and you’d have a hard time proving you didn’t agree to those terms.
