What is a Predatory Loan?
Predatory lending is pervasive across the U.S. It is a lending practice that preys on the low-income, the elderly, minorities, and other groups who are otherwise unable to obtain mortgage loans, auto loans, and other consumer and personal loans due to their financial situations.
Perhaps your credit score has taken a financial hit. Or maybe you’re trying to obtain a mortgage loan, but your income isn’t high enough. Perhaps you have a little too much debt. You may be contacted by predatory lenders offering you loans that sound good but that have undesirable terms.
What are Predatory Loans?
A predatory loan can be just about any type of loan that has bad and excessive terms. Predatory loans may have very high interest rates, unusual payback periods, high fees and penalties, and extra costs. Here are some examples:
- Mortgage Loans. Watch out for predatory mortgage loans. If you are trying to either get a mortgage for the first time or you already have a mortgage and are trying to refinance your house, and you have too little income or too much debt, you could become the target for predatory lending. The loans you are offered, possibly by telemarketers or online, will sound good, but they may have high application fees or very high closing costs.
- Payday Loans: Payday loans are short-term loans that are due on your following payday. You do not have to have your credit report pulled in order to receive a payday loan. You must have proof of employment, a pay stub, and proof of having a bank account. The finance charges on payday loans, similar to credit card finance charges, are so high that the annual percentage rate may be close to three digits. Payday loans are dangerous because they can be extended and you end up paying extremely high interest. If you default on a payday loan, the collection process is brutal and your credit score can be impacted for years.
- Title Loan. A car title loan means giving the title of your car to a lender and receiving cash in return for it. Your car must be paid in full for this to be possible. If you don’t repay the loan according to the terms, the lender can repossess your car. Title loans must be paid off quickly and, like the payday loan, often have three-figure APRs.
- Balloon Payments. If a mortgage lender tries to sell you a loan wherein your payments are low at first, but then a large payment is due at the end of the mortgage, beware. This large payment is a balloon payment and this type of mortgage loan is often offered by predatory lenders. Although, if the value of your home goes up, the balloon payment at the end may be easy to pay.
- Negative Amortization. Negative amortization occurs when you borrow money, usually for a student loan or a mortgage, and pay less than the interest cost every month. The lender then adds the remaining interest cost to your loan balance. For as long as you practice negative amortization, your loan balance grows.
- Packing Loans. Packing loans (also called stacking) occur when lenders add on fees and penalties to a loan and put them in the fine print in the hopes that the borrower won’t read the fine print.
How Can Consumers Protect Themselves Against Predatory Lending?
There are clear signs that a loan is being offered by a predatory lender if you look closely. You will probably already have a feeling that something is wrong with the lender and the loan. These lenders are normally fast and slick talkers. If the loan sounds too good to be true then it is. Look for these signs to protect yourself.
- Very High-Interest Rates. Read the fine print of the loan contract. Often, the interest rate will approach three figures.
- Fees and Penalties. There will be high fees and penalties associated with the loan. Penalties will be high if a payment is missed. The loan may also have a high origination fee or prepayment penalty.
- Phone Calls and Text Messages. If the lender makes a lot of phone calls to you and sends you text messages about the loan, which are high pressure sales methods, you should realize that there is something wrong.
What are the Risks of Predatory Lending?
If you take on a predatory loan, it may be because you feel that you can’t qualify for other, more traditional loans. Predatory loans will only make your financial life worse. If you get a predatory mortgage loan, you could lose your home because you might be subject to negative amortization or a balloon payment. You could lose your car if you get a title loan. If you apply for and receive a payday loan, you could ruin your credit for a long time.
Other Loan Options
Instead of getting a predatory loan, go to your local credit union. Ask about a payday alternative loan (PAL). Credit unions are good places for small, personal loans. They can also help you get your finances in order.
Peer-to-peer loans are another option you might consider if you have a problem getting a loan from a bank or a credit union. They are loans that investors with extra money make to individuals in the online marketplace, regardless of credit history.
Here are more options to consider for you if your income is low, debt is high, or you feel like your credit score is not high enough to qualify for traditional loans.
If you have been a victim of predatory lending, you can file a complaint with the Consumer Financial Protection Bureau.