Key Characteristics of Predatory Lending
Predatory lenders design their business model around the borrower’s potential failure. They often profit most when you are forced to refinance repeatedly (incurring new fees each time) or default on the loan, which allows them to seize your collateral, such as a car or home.
They achieve this through several tactics:
- Hiding the True Cost: They use confusing jargon and complex fee structures to obscure an extremely high Annual Percentage Rate (APR).
- Applying High-Pressure Sales Tactics: Lenders may rush you to sign documents before you can read them thoroughly, creating a false sense of urgency by claiming an offer is about to expire.
- Targeting Vulnerable Borrowers: These lenders often seek out individuals with poor credit scores, low income, or limited financial literacy, assuming they lack better options or won’t understand the fine print.
Common Red Flags of a Predatory Loan
Learning to spot the warning signs is the best way to protect yourself from financial harm. Be cautious if a lender:
- Promises guaranteed approval without assessing your credit or ability to repay.
- Packs excessive fees into the loan, such as large origination fees or unnecessary credit insurance, which inflates your total balance.
- Includes a balloon payment, which is a large lump-sum payment due at the end of the loan term. If you cannot afford it, the lender may pressure you into an unfavorable refinance.
- Encourages “loan flipping,” a practice of repeatedly refinancing a loan to generate new fees for the lender without any real benefit to you.
- Imposes steep prepayment penalties that charge you a fee for paying off the loan early, trapping you in a high-interest debt cycle.
- Asks you to sign blank or incomplete forms, which they can alter later to include terms you never agreed to.
How to Protect Yourself and What to Do If You’re a Victim
Vigilance and awareness are your strongest defenses. Follow these strategies to stay safe:
- Shop Around: Always compare rates and fees from multiple reputable sources, such as banks and credit unions.
- Read Everything: Carefully review all loan documents before signing. If a lender is evasive when you ask questions, consider it a major red flag.
- Consult an Expert: For significant loans like a mortgage, seek advice from a non-profit housing counselor or a trusted financial advisor.
- Know Your Rights: The federal Truth in Lending Act (TILA) requires lenders to provide clear disclosures of loan terms and costs. If you do not receive a Loan Estimate or Closing Disclosure, the lender may be violating the law.
If you believe you have a predatory loan, you can file a complaint with the Consumer Financial Protection Bureau (CFPB) or contact your state’s Attorney General’s office for assistance.