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Predatory Lending

What does "predatory lending" mean?

Abusive or "predatory" lenders target people who are strapped for cash - often preying on the elderly and people in lower-income groups. But their loans usually have sky-high interest rates and fees. They're often illegal, too.

You need to know a "good" loan from a bad one. Otherwise, you could end up paying too much, hurting your credit rating - and even losing your home.

Home equity scams are worth mentioning specifically. These are a common practice of predatory lenders, who seek out people who are cash-poor but have equity in their house. Before the borrowers know what hit them, they may have signed on to a loan they can't pay, eventually leading to foreclosure on their home.

How do I know a "bad loan" when I see it?

These are some things you might hear from a predatory lender:

  • "This deal won't last long." You are pressured by lenders who say they can "guarantee" you a "bargain" loan…only if you apply today. Legitimate lenders won't pressure you into impulse decisions.
  • "Bad credit is no problem." Predatory lenders seek out people who have bad credit - they make most of their money from the high fees and closing costs to refinance the loan they knew you couldn't repay in the first place. Legitimate lenders don't do business this way.
  • "I can get you a low payment you won't believe." Unusually low monthly payments may be a red flag that you are signing a "balloon" note - a loan that requires a big "balloon" payment at the end. If you can't pay the final lump sum, you will have to refinance it - for a fee and often a higher interest rate. Balloon payments work for some borrowers, but legitimate lenders will explain the pros and cons to you and offer other options.
  • "Don't worry about the details - just sign." Predatory lenders know that if you understand "the fine print," you may see that you're getting a bad deal. Legitimate lenders make sure you understand every part of a contract and won't gloss over important details.

You should always be cautious and "do your homework" when shopping for a loan. If it sounds too good to be true, it probably is.

How can I get a loan that is legitimate and fair?

  • Shop around. Check with other lenders, such as local banks, to find the best rates and total costs.
  • Ask questions. Never be afraid to ask the lender to explain any fees, terms or conditions you don't understand.
  • Get references. Don't rely on the lender's word. Also, call your local Better Business Bureau to find out if complaints have been filed against the lender.
  • Read first. Sign later. Don't sign anything you don't understand, and never sign a blank or partially completed document.

What if I think I made a mistake?

  • You may be able to change your mind. Remember that you have the legal right to change your mind within three business days of signing most loan contracts that use your home as the security.
  • Report predatory lending practices. Notify the Federal Trade Commission if you encounter a predatory lender. Even if you weren't talked into a bad loan, someone else will be.

AND REMEMBER: If you need to pay off a debt, such as medical bills or home repairs, there are many legitimate lenders who can provide loans with reasonable rates and terms. If you have bad credit or don't qualify for one of these loans, nonprofit credit counseling agencies can help you find another way to manage your debt.