How to Spot and Avoid Predatory Lending Practices

It’s a known fact all loans are not created equally. From differing interest rates to varying costs and fees, no two loans are the same. However, some loans are predatory in nature and are designed to prey on the borrower in several ways. Keep reading for more information on predatory lending practices, including tips on how to spot and void these types of loans.

What is Predatory Lending?

Predatory lending practices are characterized by unfair or abusive terms placed on the borrower. In some cases, these unfair terms are the result of exploitation, coercion, or deception on the part of the lender, in hopes the borrower will agree to a loan he or she doesn’t want, doesn’t need, or can’t afford.

By definition, these practices benefit the lender and often rely on the borrower’s inability to understand loans, loan terms, or finances, in general. And while even seasoned borrowers have fallen prey to these practices, predatory lenders typically target the elderly, minorities, the poor, and the less educated. What’s more, individuals who need fast cash can also fall victim to predatory lending. For example, predatory lenders often target the unemployed, people with large medical bills or other debts, single parents, etc.

Common Predatory Lending Practices

Actions like the following can be described as predatory lending practices:

• Risk-based pricing. While risk-based pricing is a common lending practice, predatory lenders charge extremely high interest rates to borrowers who are likely to default, e.g., individuals with no job or with very poor credit.
• False disclosure. Predatory lenders may misrepresent, or downright lie about, a loan’s terms. For example, factors like true cost might be misrepresented, or changed after the initial offer.
• Loan flipping. This practice involves encouraging the borrower to refinance an existing loan into one with additional fees and much higher interest rates.
• Inflated fees. In the terms of a predatory loan, preparation fees, closing costs, appraisals and other fees are much higher than they’d be from a reputable lender.
• Asset-based lending. Predatory lenders might loan money based on the worth of assets (such as home equity), rather than on the borrower’s income/ability to pay.

How to Spot a Predatory Loan

Predatory loans often seem too good to be true, and borrowers are often pressured to sign on the spot. Predatory lending is also associated with red flags like the following:

• Unauthorized refinancing.
• Penalties for early payoff.
• Extremely high interest rates.
• Balloon payments.
• Payments you can’t afford.

Avoiding Predatory Loans

Thankfully, when armed with the right information, predatory loans can be avoided. For example, when shopping for a loan, keep the following pointers in mind:

• Do your research. Before accepting a loan, research the lender as thoroughly as possible. Read customer reviews online, check social media pages for customer feedback, etc. For example, the MaxLend Loans Twitter and MaxLend Loans Blogspot pages supply information to consumers looking for a loan.
• Always shop around. It’s probably best to turn down the first loan you’re offered; to find the loan to suit your needs, shop around.
• Don’t fall for high-pressure sales tactics. If you feel uncomfortable, or something just feels “off,” you’re better off taking your business elsewhere.
• Ask lots of questions. If you don’t understand any of a particular loan’s terms or language, bring in a trusted friend or adviser to look over documents before signing.
• Don’t focus on monthly payments. Low monthly payments aren’t always ideal; instead, look at the total cost of the loan in question.
• Avoid loans that seem too good to be true. For example, be wary of ads proclaiming “No Credit? No Problem.”
• Be wary of refinancing promises. Often, predatory lenders will promise to refinance loans in the future, all with better terms and interest rates.
• Know what you’re signing. Never sign a blank document, or any document the lender promises to fill in later.

Predatory loans are unethical and, in some cases, illegal. Thankfully, with the tips provided here, you can spot and avoid predatory lending practices, and move on to a lender who will best suit your needs.