Predatory lending is any kind of lending that gives people loans with unfair or abusive terms. This includes high-interest rates, huge fees, and terms that take away the borrower’s equity. As the name suggests, lenders just take advantage of people who are desperate for loans by using deceptive methods and pretending to help them. Contrary to what many assume, loan sharks aren’t the only predatory lenders. A lot of predatory lending is done by well-known companies or institutions like banks, finance companies, mortgage brokers, lawyers, and real estate contractors. To ensure you don’t fall victim to such practices, this guide is detailed to highlight everything you need to know about predatory lending, its examples, a list of some of the lenders involved in it, and how to avoid or get out of one.
How Do Predatory Lending Work?
Predatory lenders exploit borrowers by taking advantage of their weaknesses or rather, desperate need for loans. Your credit score won’t improve as a result of this loan. When it comes to predatory lending, they are actions taken by lenders that encourage borrowers to take out loans that they cannot afford. They also come with exorbitant interest rates over the going market rate and fall under the category of predatory lending.
For example, a borrower who is about to lose his home to foreclosure might run into a loan shark who will take advantage of his situation. He will charge him very high-interest rates, and sometimes even use physical force to get the money back. According to Investopedia, larger, more reputable businesses like banks, finance companies, mortgage brokers, lawyers, or real estate contractors are more likely to engage in predatory lending.
What Is Another Name for Predatory Lending?
Another name for predatory lending is abusive or unfair lending practices.
What Are Signs of Predatory Lending Practices?
The following are some of the signs of predatory lending practices;
- The loan comes with hefty fees
- Credit insurance is required with the whole premium paid in advance
- Very high-interest rate, or no rate at all
- Term loans that do not amortize
- Prepayment fees are quite steep
- Lender employs high-pressure sales strategies
How to Avoid Predatory Lending
The keys to avoiding falling for predatory loans are knowledge and essential research. Make sure you understand any loan agreements you sign and figure out how much you will have to pay back. If you don’t want to be a victim of predatory lending, you have to take matters into your own hands. There are certain signs that you must look out for to ensure that you don’t become a victim. As always, remember that it’s better not to be a victim than to try to get out of such an agreement. To avoid predatory lending, you need to know the signs of a predatory loan. Additionally, you need to be financially intelligent, borrow money wisely, and also know what your options are.
There are also laws that control these kinds of loan terms, which means you need to be financially literate. However, predatory lending keeps growing even as these laws are put into place. The following warning signs or red flags you should be on the lookout for;
#1. Overly Good Offer
One of the tactics that predatory lenders use to lure clients is making exaggerated offers. In other words, they are simply too good to be true. Imagine having a very bad credit report, but someone still offers to lend you money regardless of your credit history. Some of these tactics include the promise of fast money, easy approval, or very low-interest rates to get you to borrow money from them. Of course, there is always a catch that could severely hurt your credit history. This may include high fees, interest rates that skyrocket after a few months, or the need to put up collateral, such as your home or car.
#2. No DIsclose Cost
Once you notice their cost is not disclosed, run. Reputable lenders tell you everything about the costs of a loan, including the annual percentage rate (APR), the length of the loan term, the fees, and any prepayment penalties. This is another potent way of identifying predatory lenders. and if you can spot them, you can avoid them. You should look for a new lender if the current one isn’t providing you with all the information you need to make an informed decision about the loan.
#3. High Rate or Fee
The MLA across several states has mandated that loan interest rates cannot exceed 36% APR. I won’t dispute the fact that you needed money urgently, which explains why you want to take any options available, but hey, you need to carefully consider every rate and fee charge that applies to your loan before accepting it. Your loan is likely unaffordable if the interest rate is higher than that or if it starts low but could increase considerably in the future. Watch out for prepayment penalties that are too high, fees that exceed the loan’s principal, and “bundled” services like credit insurance.
Once the lender is not licensed, just run as far as possible. Don’t trust anyone who offers you a loan, whether it’s through the mail, the phone, or even a knock on your doorstep, even though you desperately need the loan. At least not without proper verification. The offer may seem tempting and convincing enough, but do not accept it. To be on the safe side, always verify a lender’s legal status to see if it’s worth your time. If it isn’t, you’re probably dealing with a loan shark because private money lenders aren’t subject to the same regulations as banks.
#5. Credit Checks Are Not Performed by the Lender
Most loan providers will look at your credit report before deciding whether or not to give you a loan, to gauge your ability to repay the loan and your track record with debt. Lenders who forego this procedure often aren’t concerned about whether you’ll be able to repay the money. They will try to scam you with extortionate interest rates, hefty service charges, the use of your automobile as collateral, or even by hacking into your bank account. What this means is that the lender doesn’t care if they get paid back on their loan or not, and you won’t be able to either.
#6. Requires Electronic Payments
In general, many people offer automatic payment plans, which give them access to your bank account. That way, the money is deducted at the stipulated time. Be wary if the lender insists on a specific payment method, though. These lenders will keep trying to take the same amount out of your account until they get it. Each time, they will charge you a high overdraft fee.
#6. Requires Signature With Blank Space Document
Wait a minute, what will make you sign a document with blank spaces? Whatever agreement later appears on those documents’ pages will bind you. Lenders leave blanks in contracts on purpose so they can later fill them in to make it appear as though you committed to provisions you were unaware of. Always make sure that there are no blanks in the contracts you sign before committing to anything.
#7. No Clear Response
Unreliable lenders often force their clients to sign documents without giving them enough time to read them carefully or ask any questions they might have. It’s a red flag if there’s something in the contract you don’t understand and the lender won’t explain it to you.
#8. Your Credit Score Won’t Improve as a Result of This Loan
Your credit score will go up if you pay back a loan on time to a reputable lender who tells credit reporting agencies about it. While most banks and credit unions do this, numerous predatory lenders like payday loan services often don’t. Even though borrowing from them won’t help your credit, failing to repay a loan and having it sent to collections will.
List of Predatory Lending Companies
The following is a list of some of the predatory lending companies across the states;
- EasyPay
- Elevate
- OppLoans
- Enova
- American First Finance,
- Axcess Financial,
- Enova, LoanMart
- Personify Financial
- Total Loan
How to Get Out of a Predatory Loan
It’s much better to avoid becoming a victim of a predatory loan than to try to get out of one. However, you are already a victim, the following steps will help you get out of the agreement;
#1. Kindly Report the Lender
Contrary to what people assume, you can report a loan shark organization in the United States. To begin, you should file a complaint against the lender who offered you the predatory loan. Don’t keep quiet if you’ve experienced predatory lending. The information you provide in your complaint could prevent others from falling victim, too.
Get in touch with the Federal Trade Commission (FFTC) about your ordeal. The system keeps an eye out for fraudulent loan applications. The Federal Trade Commission can be contacted if you believe a lender has committed fraud against you by providing false information regarding a loan
#2. Exercise Your Right of Rescission
Generally, all lines of credit and some loans come with a revocation right. Under the TILA, the lender must give the borrower an official Notice of Rescission that says the borrower has the right to cancel the loan and explains how to do so. If your Notice of Revocation doesn’t say what to do, you should tell the lender in writing that you want to cancel the loan within the three-day time limit. As such, if you change your mind about the loan anytime within the first three days after signing it, you won’t have to pay any penalties.
Of course, this only applies to loans with the rescission right. If your lender did not give you a Notice of Rescission or if that notice was not correct, the whole loan agreement could be thrown out. The Consumer Financial Protection Bureau says that under these conditions, you would have three years from the date of signing the agreement to withdraw from it. In summary, speak with a lawyer who’s grounded in cases such as this. They’ll definitely tell you which of the above options is most appealing in your case.
#3. File a Lawsuit Against the Lender
I recently found out that Mortgage 101 states that if you sue over a predatory mortgage loan, you could receive compensation equal to two times the amount of financing charges you paid. If the Truth in Lending Act (TILA) or any other applicable federal or state lending law is found to be broken in your loan agreement, you may be able to take legal action.
Although consulting a professional lawyer comes with a price, you’ll have to decide exactly what you want to achieve. When predatory lenders want to avoid legal responsibility in case of a borrower-lender dispute, they often include a clause that says the borrower and lender must go to arbitration.
#4. To Refinance the Loan
The best way to get out of a predatory loan is to refinance it. By taking out a new loan to pay off an existing, abusive loan, refinancing can be seen as a solution to the problem. If you do this, you can replace your current loan with one that has more advantageous terms, such as a reduced interest rate and fewer fees.
Predatory lenders might try to stop you from doing this by charging you a lot of money if you pay off your loan early. It’s possible that the cost of paying the penalty will be less than the expense of continuing to make high-interest payments on your current loan. Find alternative loan providers and have them do the math for you to determine how much a new loan might set you back.
What Is an Example of Predatory Lending?
When a lender takes advantage of a borrower by forcing them to agree to bad or impossible loan terms, this is called predatory lending. A predatory lender is one that constantly tries to get you to “flip” your loans and has big balloon payments, high prepayment fees, and high-interest rates. mortgage at more advantageous terms. What you need to know most about this form of fraud is that it is against the law for anyone to charge you money without first providing you with a signed written offer of mortgage relief from your lender. Mortgage relief services must tell you upfront about all costs and the possibility of foreclosure if payments aren’t made.
What Are the Types of Predatory Lending?
The following are some of the various types of predatory lending;
- Subprime Mortgages
- Predatory Lenders
- Settlements
- Payday Loans
- Auto-Title Loans
Who Regulates Predatory Lending?
The Federal Reserve Board is in charge of keeping an eye on all home mortgages to make sure they are in the best interests of the public.
- Consumer Credit Protection Act: Understanding Consumer Credit Protection Act of 1968
- Hard Money Lending: Meaning and All You Need to Know
- WORKING CAPITAL LOANS: Documents, Examples, and How to Get Funding for Working Capital
- ALTERNATIVE LENDING: The Ultimate Guide to Alternative Loan Options in 2023
- LOAN SHARK: All You Need To Know
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