Predatory Lending: Understanding and Protecting Yourself From This Practice
What is Predatory Lending?
Predatory lending is a practice where lenders take advantage of borrowers for their own gain. Lenders often act deceptively through unclear terms and conditions. Borrowers are convinced to carry loans that have high interest rates and excessive fees. Oftentimes, minorities, the elderly, the poor, the uneducated and those with low credit scores (650 or below) are the prime targets of predatory lending.
Predatory Lending Warning Signs
Reputable lenders lend to borrowers who they believe can repay the loan. The borrower receives the money they need at a reasonable interest rate. When the borrower repays the loan including the interest accrued, the lender makes money. Typically, predatory lenders aren’t worried about the repayment of the loan. Their goal is to make money by charging fees and high interest rates above the original principal.
Here are predatory lending warning signs:
- High interest rates: A three-digit interest rate is a major red flag. Payday lenders can charge rates as high as 300 percent.
- Excessive fees and add-on services: Predatory lenders roll other costs into a loan without being transparent about what they are. Or, they charge more fees just because the borrower has a low (or no) credit score.
- High-risk secured lending: Predatory lenders will offer loans to borrowers without checking their credit. The lender will also require collateral such as a car title or home equity. These borrowers typically can’t afford the loan they are coerced into getting.
- Pre-payment penalty: A predatory lender may charge a fee for paying off the loan early. This fee can add up to thousands of dollars over a period of time.
- Loan flipping: Normally when a borrower refinances a loan, they receive a lower interest rate and/or monthly payment. However, predatory lenders will refinance a loan at higher rate that is more expensive than the previous debt.
Protect Yourself from Predatory Lending
There are many federal laws in place to protect borrowers from predatory lenders. It’s important to educate yourself of the warning signs and know what your rights are as a consumer. Protections include:
- Equal Credit Opportunity Act (ECOA): This law makes it illegal for a lender to impose a higher interest rate or higher fees based on a person’s race, color, religion, sex, age, marital status or national origin.
- Home Ownership and Equity Protection Act (HOEPA) – This act protects lenders from excessive fees and interest rates and requires additional disclosures on loans that are considered “high cost.”