Although there are likely far more honest lenders around than dishonest ones, there are certainly more than enough unscrupulous individuals and companies vying for your business. It’s therefore wise and prudent to be aware of the common tactics of predatory lenders, so that you won’t fall victim to their trappings.
The subprime market is an area in which predatory lending seems to have found a haven. Now, that’s not to say that every subprime loan is a predatory loan. And there indeed are very reputable subprime lenders. But the fact is that crooked lenders, like all predators, tend to target the easiest prey that they can find. People with poor credit and therefore few alternatives, the elderly, non-English-speaking and ethnic individuals are all likely candidates for dishonest lenders. Even people with perfectly good credit that fall into these categories could find themselves at risk, because what the predatory lender really wants to take advantage of is their lack of knowledge, both about their own financial situation and about how the lending market actually works.
So, if you’re in the market for a loan, protect yourself by getting as much information as you can before you apply. Find out what loan programs are available, and what you qualify for. To do this, you’ll have to be aware of your own credit situation by ordering a copy of your credit report. And keep a sharp eye for these possible predatory strategies:
- Requiring money upfront. A nominal application fee is okay, but an excessively large one, or numerous other preliminary fees, is a bad sign.
- An excessively high interest rate. The difference between prime and subprime rates will vary among lenders, as well as among loan types and terms. However, once you get to about five- or six percent above prime, start shopping again. It’s likely you can do better.
- A balloon payment. Avoid them completely if at all possible. If not, make sure that it doesn’t become due in too short a time period, such as in the first three- to five years.
- Pushing a bigger loan. If a lender tries to get you to take more money than you need, especially if your home is to be used as collateral, be very cautious. If you must borrow, always choose the least amount that will meet your needs, for the shortest period of time that’s feasible, with the lowest annual percentage rate (APR).
- Charging excessive fees. Some fees are legitimate. Others don’t appear in the initial disclosure; these are called “backdoor fees”, and you want to watch out for them. Add everything up for yourself, and question anything that you aren’t sure about. Also, you shouldn’t have to pay more than one or two points even for a subprime loan. You can find competitive subprime lenders who will make loans along those terms.
- Prepayment penalties. If your financial situation improves, you’ll be penalized for trying to refinance into a loan with better terms. No prepayment penalty is best; if you can’t get that, a one-year prepayment penalty is okay.
- A mandatory arbitration clause. With this clause, if a dispute arises you give up your right to sue for any reason and agree instead to binding arbitration. This should ideally be agreed upon at the time of the dispute, and not be a condition for obtaining the loan.
- Using high-pressure tactics. Being compelled to sign quickly, or to sign blank loan forms, or encouraged to falsify your application information are all examples of high-pressure tactics. Never do any of these, under any circumstances. If necessary, have your lawyer or accountant look over the documents.
- “No job, no credit – no problem.” If a lender is more concerned about your collateral (whether it be jewelry, car, or house) than your financial situation, get out of there. The lender knows that you’re a bad risk, and is focusing on taking your assets.
- A complicated loan. With the addition of concepts like interest-only loans, adjustable rates and negative amortization, loans have gotten much more complex. Lenders know this, and some of them are counting on you not understanding and simply trusting them. Don’t do it. Educate yourself on how these loans work. Ask questions, and use mortgage calculators to run the numbers yourself.
You can find out more about predatory lenders and how to protect yourself from them by visiting these two websites: The Department of Housing and Urban Development (HUD), and the Center for Responsible Lending.
