What is predatory lending, and how does it affect you?
With the growth of payday and short-term loans in the US, so the threat of predatory lending has also increased. But what is predatory lending? Well, it is commonly defined as any practice which uses unfair and fraudulent means so as to entice borrowers into loans that they don’t need and cannot afford. Of course, the specifics of this definition has changed as the predatory lenders have adapted to attract more borrowers, but the general idea stands. Predatory lending is a real problem and a debt-laden nation into more trouble.
So, what is being done about such a threat? Well, the FCA (Financial Conduct Authority) has recently imposed a set of new rules so as to hold poor practice responsible and limit the profit made by payday and other high-cost, short-term loans. Most payday loans are repaid late or not at all, meaning that borrowers continue to rack up fees they cannot afford. These new regulations look to ensure that these practices are not taking advantage of people who are unable to afford taking out such a loan in the first place.
But how does one understand when the lenders are being deceptive?
The Main Features
There are seven main characteristics of predatory lending, listed below:
- Loan Flipping: The scammer will give you cash to refinance your already existing mortgage. You’re probably thinking, why would anyone take a loan to pay another loan? Sometimes in life it may happen that due to unforeseen circumstances, you may have more financial spendings, making it difficult to pay back the mortgage. When you don’t want to block your mortgage or default, you may find it tempting to get another loan. The risks? The second loan from scammers will have higher interest rates than the first loan and you will end up paying more than your initial loan for a longer period of time.
- Excessive fees: These extra fees are hidden in your payments, so you do not realise that you are paying more than you should and that the extra cash is going straight into the scammer’s pockets. If in case there is nothing written about it in the terms and conditions, compare the scammers prices and costs with reputable lenders.
- Loan Packing: Extra services which you are paying without your consent, such as credit insurance, but are part of the loan. You either accept the loan with all the extra costs or you get nothing.
- Equity Stripping: The scammer offers to buy your house (when you face foreclosure) and lease it back to you. This may seem beneficial for the borrower, as it means that they won’t have to leave their home, but it also means that the scammers may evict you at any moment, regardless of all the money you have paid back.
- Balloon Payments: These are loan payments which seem small in the beginning, but actually get bigger as time goes by (whereas a normal mortgage would slowly decrease). If the borrower cannot repay it, the scammer will re-finance your loan i.e. give you a new loan with even higher rates and costs
- Prepayment penalties: If you manage to pay off your loan earlier, than you will be subjected to a penalty.
- Mandatory arbitration: You cannot take legal action against the scammer for fraud, predatory or illegal actions as in the signed contract you have given away the right to sue them.
Now you know what to look out for, but how do you avoid it?
The Telltale Signs
Here are some questions you can ask yourself when faced with predatory lending:
- Is the scammer being too persuasive, persistent and pushy?
- Are you in need of immediate cash for a big repayment such as a house mortgage/medical bills or car insurance?
- Is the scammer promising you that you will get a loan regardless of your credit history?
- Is the scammer someone who goes door-to-door/telephones or emails?
If the answer is yes to any of these, be cautious, read everything, think and talk about it with someone you trust, and don’t sign it. You don’t want someone who could scam you to become richer and own your property.