What You Need to Know About Predatory Lending
By: LawInfo
Published: 12/2008
In difficult economic times, many people will pursue whatever legal means are necessary in order to meet their families’ financial obligations. Sometimes, that means taking out additional loans to pay off existing debts or taking out loans with unfavorable terms. However, while some of those loans promise short term solutions they often pose long term problems and borrowers should borrow with caution.
People commonly refer to lenders who engage in the practice of loaning money with unethical or illegal terms as “predatory lenders.” There is no common definition of predatory lending. Any loan that unfairly, unethically or illegally takes advantage of someone because they are not in a position to understand the loan terms or because they are not in a position to seek a loan elsewhere may be considered a predatory loan.
Common Types of Predatory Loan Practices
In order to protect yourself from the harm that can be caused by a predatory loan, it is important to understand how predatory lenders try to take advantage of borrowers.
- They Lie. Predatory lenders might lie about the terms of the loan or they might appraise your property at a level that is significantly higher than it is really worth. Or, lenders might encourage you to lie and state that your income, occupation or assets are significantly different than they are in fact. Then, you enter a loan agreement based on untrue facts and cannot afford to make the payments.
- They Take Advantage of You. Some predatory lenders assume that their borrowers will either not understand the terms or that they will accept whatever loan terms are offered. For example, a lender might add in high fees for services that are not part of the loan agreement. Or, a lender might charge higher interest rates for borrowers who do not speak English well and who might assume that everyone pays the same astronomical interest rate.
- They Pressure the Vulnerable. Unethical lenders might convince you that without their help you will lose your home. They target those who having trouble paying their debts or who have suffered a medical emergency or personal tragedy that make paying the bills difficult. They may assure you that they will help you. Instead, they loan you more money at a rate that you cannot afford to repay.
How to Avoid a Predatory Loan
Predatory lenders can be sneaky and it can be difficult to avoid a bad loan. However, the following tips will help you lower your chances of entering into such a loan.
- Read Every Word. The best way to avoid entering into a predatory loan is to read every line of the proposed loan agreement and to ask questions about anything that you don’t understand or is not written as agreed upon.
- Never Sign Blank Documents. Do not give the lender the chance to bind you to terms that you are unaware of or might not agree to if they were written and reviewed by you.
- Shop around. Do not let a lender pressure you in to signing anything before you are ready or dissuade you from comparing terms with other lenders.
- Educate yourself. Before you buy a home, attend a workshop conducted by credit agencies that are approved by the US Department of Housing and Urban Development (HUD) or do research on trusted websites.
- Know with Whom You are Doing Business. Ask for references and check them thoroughly prior to entering any kind of agreement.
When people come upon hard economic times, they are understandably anxious to meet both their financial and personal obligations. So, some people enter into agreements that take advantage of their situations. However, each individual needs to be careful not to do business with a predatory lender who can create more problems and make a bad situation even worse.
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