What is predatory lending? Not enough people are asking this question. This is a financial loan that will destroy your credit history, your financial future, and possibly your life!
I’m bringing this up now because COVID 19 is taking an ugly turn in our local communities. When people are not receiving their wages they turn to private loans for income. They want to make sure they don’t lose their homes, healthcare, food, etc.
The small business program, designed to help small businesses pay their employees, had $349 Billion U.S. Dollars in it. ss of this past weekend it was completely bankrupt.
It only covered 1.4 million loans!
22 million Americans have applied for unemployment pay in the last 4 weeks and even more, are expected to apply.
These desperate times are going to lead individuals like you to living-off of debt in the form of small personal loans.
Everything written here will teach you how to find the best loan for your circumstances and a lender who won’t take advantage of you.
What Is Predatory Lending
Here is the quick definition: these loans are designed to benefit the person loaning you the money (lender) while financially ruining YOU the borrower.
These lending practices are able to pressure a borrower in accepting repayment terms that are unfair and abusive. The borrower will find they are responsible for a loan they did not want, need, or flat out can’t afford.
How to Spot Predatory Lending
A predatory loan will always be the most expensive loan you will ever have. The lender will charge high yearly fees until the loan is paid off. The loan will have a high-interest rate and will have a larger balance than what you originally wanted.
Predatory loans are not designed to fit your current situation. They are designed to make money!
Remember the mortgage loan crash in 2009? 861,664 families lost their homes during this time period; according to a report by CNN Money.
These mortgage loans were predatory loans. They had interest rates designed to increase over the course of the loan along with balloon payments.
A balloon payment means their mortgage payments were only covering the interest. A lump-sum payment at the end of the loan term is required to pay off the actual principle.
This made the loan appear to be a cheaper option for these borrowers who didn’t understand how it was going to actually cost them more in the end.
Who Is the Primary Target of a Predatory Lender?
A predatory lender will always try to target groups or individuals who they believe to lack enough financial education or who haven’t talked with another lender yet.
Here is a list of primary targets:
1. Families with poverty-level income
2. Elderly
3. Less-educated in finances (This could be anyone in any age group)
4. Individuals of a minority group
5. In a hurry to get emergency cash (COVID 19 loans anyone?)
*These last two are blocked by normal lines of credit available to everyone else and have nowhere else to turn
6. Recently unemployed
7. Individuals with bad credit history
Red Flags of a Predatory Lender
The idea behind my research in this blog is not to scare you away from taking lines of credit. It is to arm you with the necessary knowledge to protect your family financially.
10 Common red flags to look for:
1. Are the promises too good to be true?
2. Do you feel pressure to sign now, now, NOW; before the offer leaves the table?
3. Is the lender trying to talk you out of a fixed interest rate into a loan with a changing rate or they’re trying to get you to borrow more than you need/want?
4. The lender tells you to lie on your loan application to ensure you get approved. (This is a felony in some states)
5. They’re lending fees are higher than other loan companies.
a. If this is the first lender you are talking to does the fee really sound reasonable to you?
6. Look at the fees and terms closely during the closing process. Did the fees increase significantly? Will the terms cost you more money at the end of the loan repayment?
a. Most honest lenders will give you lower fees and better terms at closing than they promised if these fees change. They want the loan to end in your favor.
b. You can always terminate the deal at closing before signing! Don’t be afraid to walk away!
7. The lender contacts you at home to solicit their business; phone calls, mailings, door to door salesmen, etc.
8. Keep trying to get you to sign for a high-risk loan with the promise to refinance later for better terms or interest rate.
9. Tell you not to waste your time reading the documents they want you to sign. Or they want you to sign incomplete forms.
10. Being charged fees/penalties you don’t understand.
How To Choose A Good Lender You Can Trust
Before you go out to start talking to lenders and filling out applications. Do a little research first.
You want to make sure you know where your credit history stands as well as who the best lenders to speak to for your needs are. This will eliminate a lot of footwork before you get started.
Most of the lenders may even have an “apply online” option to save you time!
Your credit history and credit score
Make sure you know where you stand. This will help you confirm what type of interest rate you actually qualify for.
The better your credit the better the interest rate offer. If you know your credit isn’t all that great and a lender is offering you 3% interest anyway…that is your red flag they are a predatory lender.
Talk to your friends
Find out if any of your friends have taken out a loan. What their experience was like. Do they recommend anyone or warn you to stay away from a particular lender?
Create your list of lenders you want to speak to
Most if not all lenders have a little bit of loan information available online for you to research. Find out which ones offer the type of loan you are looking for.
Learn the difference between the terms – Interest and APR
I know this sounds silly but these are really important. But I’ll save you some time!
Interest is a percentage of the loan you will be charged per month plus the entire amount you are borrowing. It’s like a rental fee for borrowing the money.
APR (Annual Percentage Rate) is a fee you will be charged per year until the loan is paid off. This fee is usually on top of the interest payment, the amount you are borrowing, and includes additional costs for borrowing the money. Ex: closing costs, broker fees, etc.
What are other borrowers paying for the type of loan you are after?
Google is your best friend here. If you go to Bankrate.com you can find out how much other borrowers are paying for your loan type.
Do Not Ignore the Reviews
I am emphasizing this one on its own because I feel like it is the most important while doing your research.
The customer reviews will let you know what the customer service is like for each lender. You want to avoid lenders who take your business and then you never hear from them again!
Make sure when you have questions they are answered in a timely manner.
Find out what the approval turn-around time is for your application.
Is the lender going to constantly send you spam emails trying to sell you more loan products?
Don’t become just another loan file. Find someone who is actually there to work with you and help.
Questions To Ask During the Loan Process
While you are completing the approval process the lender will have a lot of questions for you. It is always a good idea to have some in return.
The loan process isn’t just about YOU borrowing MONEY. It is also about HIRING a company to LOAN YOU MONEY.
You are paying them to use their money. In a way, it is like an employer (you) employee (lender) type of situation. (even though they are setting the price)
As mentioned a few minutes ago make sure this is a lender that will work with you instead of against you.
But what types of questions should you ask?
1. Find out what the loan terms are? (When the loan has to be repaid by)
2. What’s the best interest rate you can offer me? Is it fixed or adjustable?
3. How much are the monthly payments?
4. For adjustable interest rates:
· When will the interest rates be adjusted?
· How is the new interest rate calculated?
· What causes the interest rate to be re-calculated?
· How often will the interest rate change over the life of the loan
· What is the maximum interest rate increase for each adjustment?
· What is the maximum interest rate I could be charged over the life of the loan?
· How much is the monthly payment today with the largest interest rate?
· What is the good faith estimate of this loan? (includes closing costs and APR cost)
· Which costs could change between now and closing? By how much?
· Is there a prepayment penalty?
· Any other costs not included in the good faith estimate?
6. What types of loans are available for my needs?
7. How will this affect my credit score?
Additional Questions To Ask During the Mortgage Loan Process
These are additional questions to ask if you are after a mortgage loan:
1. What types of mortgage loans are available?
2. How do I need to qualify?
3. Explain the difference between pre-qualified vs. pre-approved?
4. What is the minimum down payment required?
5. What is included in my monthly payments? (property tax, homeowners insurance, mortgage, etc)
6. Can I see the loan estimate? (this will show you an entire cost breakdown including closing costs.)
Concluding Thoughts
I know this seems like a lot of information and can be a little overwhelming. But isn’t it worth it to protect your family?
The bright side is if you know exactly what type of loan you are after. What interest rate you can expect to pay. And which lenders you want to work with?
You may only have 2 or 3 banks to talk to versus 15 or 20.
Do your research now and it will pay off big time later.
Related Articles You Might Be Interested In:
Unemployed & Can’t Pay the Bills
How Do I Get Out of Debt With Bad Credit?
When Credit Cards Help Your Finances
When Credit Cards Hurt Your Finances
The Ultimate Guide To Budgeting
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