by Brenda Procter, M.S., state specialist & instructor, Personal Financial Planning, College of Human Environmental Sciences, University of Missouri Extension
Predatory lenders deceive, manipulate, pressure or engage in fraud to get a borrower to take out a loan. A predatory loan has terms that put the borrower at a big disadvantage, and usually has excessive interest rates and hidden terms and costs that the borrower does not understand.
Predatory lending abuses could be found in any kind of institution, but such abuses are often associated with rent-to-own contracts, pawn shops loans, payday loans, subprime mortgages, tax refund anticipation loans, overdraft loans and car title loans. New predatory lenders, including online lenders, are popping up every day.
A few basic signs help you recognize when a lender is using predatory practices. These are some red flags that should make a consumer wary:
• The lender pressures you to accept an offer.
• The lender ignores your questions about loan terms you do not understand.
• You get approved for a loan that is more than you wanted.
• You know you cannot make the payments you have been approved for.
• There are costs in the loan or rental papers you did not know about.
• The lender says you have to buy credit insurance to be approved.
• The loan agreement says you must pay everything back at once instead of in regular, smaller payments.
• You cannot pay off the loan early without a penalty.
• You do not have the right to sue if something goes wrong.
• The interest rate is extremely high.
• The lender asks you to sign blank papers that he or she will finish later.
• The lender keeps pressuring you to refinance and it happens several times a year.
• You were promised your monthly payments would be lower in the future, but instead they are higher.
• You received a call or a letter offering you a loan. This was not information you asked for.
Asking the right questions before agreeing to a loan can help you fully understand what you are committing to. Consider asking questions like these before applying for any kind of loan:
• What papers or information will I need to apply?
• What fees will I need to pay up front?
• How long will it take to process my application and get me my money?
• What are the total fees I will pay for the loan itself and all related requirements?
• What will be the annual percentage rate (APR) when you include all fees associated with the transaction?
• How much interest will I pay over the life of the loan? Does the interest rate stay the same for the entire loan?
• What will be my monthly or weekly payment?
• Can I make extra payments or pay the loan off early without penalty?
• Will my payments ever increase? If so, why?
• Are there extra fees if I pay late?
• Where do I make my payments?
• How long is the loan?
• Is there a large lump-sum payment at the end of the loan?
• Can I have a copy of a Good Faith Estimate or a written statement with all the fees and loan terms listed?
• How long has your company been in business?
• Who do I contact if I have questions about my loan?
• What agency or office regulates you as a lender?
For pawnshops only:
• How much will you charge for insuring and storing what I am pawning? Are there any other extra fees besides the interest?
Any reputable and honest lender should be more than happy to answer your questions. Their hesitancy to do so is a red flag. If possible, get information from at least three lenders before making a decision to borrow. You may decide that every store’s fees are too high and rethink the loan. Sometimes waiting to spend the money or coming up with it another way may make more sense once you fully understand the costs.
No matter what kind of lender you plan to do business with, learn about your rights, ask lots of questions and take enough time to get the best deal you can when you borrow from them. If it is possible, wait to spend the money and pay yourself (save) a little each paycheck to get the money you need without borrowing.
Center for Responsible Lending Web site, http://responsiblelending.org/
Freddie Mac Web site, How to Avoid Predatory Lending, http://freddiemac.com/corporate/buyown/english/mortgages/lenders/avoiding_predlend.html
Stop Mortgage Fraud, http://homeloanlearningcenter.com/
Squires, G. Why the Poor Pay More. Praeger Publishers, Westport, CT, 2004.