Feature Articles: Loans
Learning for Better Living
When Creditors are Predators
Brenda Procter, M.S., State Specialist & Instructor,
Personal Financial Planning, University of Missouri
Extension,
Suzanne McGarvey, Extension Associate, University of
Missouri Extension
What is Predatory Lending?
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 on-line lenders, are popping up every
day.
How Can You Tell if a Lender is Predatory?
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 before.
- 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.
What Questions Do I Ask Lenders to Get the Best Deal?
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 in and of itself. 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.
References:
Center for Responsible Lending Website,
http://www.responsiblelending.org/;
Freddie Mac Website, How to Avoid Predatory Lending,
http://www.freddiemac.com/corporate/buyown/english/
mortgages/lenders/avoiding_predlend.html;
Stop Mortgage Fraud,
www.stopmortgagefraud.com;
Squires, G. Why the Poor Pay More. Praeger Publishers,
Westport, CT, 2004.
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Last update: Thursday, March 20, 2008
