Predatory lending refers to the practice of supplying loans at higher than average interest rates to individuals. This term is mostly applied to home loans or people hoping to refinance home loans, but the term may also apply to home improvement, educational, automobile, and other types of loans. Aspects of predatory lending are illegal under several state and federal fair housing and consumer protection laws. People who find themselves victims of this practice can take legal action against lenders who target them.
Subprime Loans Vs. Predatory Lending
Seen largely as setting disadvantaged people up to fail, predatory lending should not be confused with subprime loans, which involve charging a higher interest rate and fees to people with a poor credit history, which many see as justifiable due to the risks involved. Predatory loans, however, rely on deception and unjust practices to lock people into loans they cannot repay. As such, predatory loans benefit the lender while often leaving borrowers in financial ruin.
When suspected of predatory practices, corrupt lenders will often attempt to use subprime lending as a defense. This seemingly gray area can sometimes be used to a lender’s advantage because the borrowers they are known to target often do not have the credit history to justify the loan amounts requested. As subprime lending is not necessarily illegal, bad actors using this cover are often able to continue with deceptive lending systems while sometimes wreaking considerable havoc on entire communities.
Some of the most common characteristics of a predatory lender include:
- Deliberately targeting people with poor financial literacy
- Deliberately offering loans to people with low credit scores who cannot obtain loans elsewhere
- Offering more money than a borrower needs
- Not providing a clear breakdown of all fees
- Adding excessive and often unnecessary upfront fees
- Charging exorbitant interest rates
- Requiring a balloon payment (a hefty sum) at the end of the loan
- Charging a high prepayment penalty
- Repeatedly offering to roll loans over into another and, thus, starting all of the above over again
- Requiring payments to be automatically debited by a banking account and forcing debits even when funds are not available
- Charging high fees for late payments
While anyone can be targeted or receive a bad loan, members of legally protected classes are the most common victims of these crimes. Such includes:
- Racial and ethnic minorities
- Elderly populations
- Recent immigrants
Predatory lenders may also target young adults new to the worlds of banking and credit. This is particularly true for those who hail from low-income households and large urban areas. Essentially, anyone in need of a loan and, in fact, anxious to secure a loan to pay for an education, a home, a car, or any number of items can potentially be targeted by predatory lenders if not careful.
How to Avoid Predatory Lenders
Financial literacy is the key to avoiding predatory lending. Before obtaining a loan, consumers should become somewhat familiar with the process. Should a consumer have questions, outright asking a lender is the most direct and responsible thing. However, not all lenders will offer an honest reply. Therefore, if you are a potential borrower, read all that you can from reputable consumer finance sites and ask a trusted friend or family member to help you understand the process if you still do not understand. If at any time, you feel like a lender is not interested in you understanding the terms of a loan or any of the fees involved, or if you feel as though you are deliberately misled, stop the process. Do not sign for a loan you are uncertain about no matter how badly you may need the money.
Shopping for a loan is also an excellent way to avoid predatory pitfalls. In doing so, a consumer can gather information and compare the trustworthiness of each lender. Such will also contribute to better financial literacy over time.
Here are a few more tips on how to avoid predatory lending:
- Never agree to borrow more than you need
- Never agree to repay more than you can comfortably afford
- Avoid contractors who offer to work for higher than average costs and who offer to connect you with a lender to help you pay for those costs
- Do not borrow money from a lender who does not check your credit history
- When other lenders have turned you down due to poor credit history, be wary of those who are willing to loan you money anyway
- Never work with a contractor, lender, or other professionals who offer to doctor your financial or credit history to make a loan possible
It bears mentioning here that when other lenders have turned you down for a loan, they often have reasonable, legitimate, and practical reasons for doing so. While delaying a purchase may feel frustrating, if your credit score or ability to repay a loan cannot support the amount you are requesting, it is in your best interest to wait until you are in a better financial position before pursuing a loan elsewhere or at all.
First-Time Homebuyers Beware
A home is most people’s greatest asset. With real estate being a prime avenue for building wealth and security, many who are not yet ready to take on the cost of a mortgage, but who are anxious to enter the world of home ownership, are often targeted by predatory lenders. So, first-time home buyers should be particularly mindful of predatory lending practices. Relying upon your excitement at owning your own home, these lenders manipulate through deception and work hard in getting you to ignore the aforementioned red flags.
Unscrupulous lenders profit from consumer ignorance and vulnerabilities and have no shame about manipulating unsuspecting borrowers by using their hopes and dreams against them. As a result, borrowers are often left bankrupt and in worse financial health than when they first accepted a loan. For many, this includes losing the very home they initially took out a loan to afford.
Other Types of Predatory Loans
While real estate loans are among the most highlighted when it comes to predatory practices, potential buyers aren’t the only ones who need to be on the lookout for bad lenders. Payday loan companies, car dealerships, and even student lending operations have been known to engage in predatory lending. Essentially, anyone with a financial need and low financial literacy can become a victim of these practices, so the tips offered here should be heeded by all.
It should also be noted that age doesn’t matter. Seniors in low-income neighborhoods are often targeted for home improvement loans. It is not uncommon for aging homeowners in inner cities to live in older structures in need of significant repairs or updating. To facilitate such, seniors may turn to lenders for capital. If one is not careful, it is easy for a deceptive lender to lock an unsuspecting person into a bad loan to pay for repairs and upgrades. Sadly, many prey specifically on elderly populations, especially if they do not have high levels of education and do not use computers to find or verify answers to questions they may have.
What Should Victims of Predatory Lending Do?
Your first step against predatory lending is recognizing it when you see it. Continue to educate yourself and ask as many questions as you may have if you’re currently applying for a loan. Take your time and never allow yourself to be pressured to sign anything you don’t understand or that you don’t believe to be in your best interest.
If you’ve already fallen victim to a bad loan, know your rights, and act upon them right away. It’s never too late to call attention to your circumstance and ask for help in correcting it. Start by contacting the Attorney General in your state and file a complaint with The U.S. Consumer Financial Protection Bureau.
Do not remain silent under the burden of a predatory loan and do not be ashamed that you have become a victim of such. Instead, fight back for yourself and for others who have likely been taken in by the same practices, too. The best way to get bad actors out of the lending business is to sound an alarm about their crimes as early and as loudly as possible.
Need More Information?
You can never have too much information. Whether pertaining to payday loans or mortgage loans, credit collections or discrimination, the more you know, the harder you can fight back. Visit our archives to search for articles on consumer rights, personal finance, and predatory lending and remember to share this information with your loved ones and with your social media followers. When citizens act together, predatory lending can be identified and stopped.