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The Tale of Predatory Lending

One day, you get a letter in the mail stating, "Need money? Bad Credit? No Problem!" It seems as though the offer may be exactly what you are looking for to consolidate your credit card bills. Getting the loan was easy, but the interest rate on the final loan paperwork was a lot higher than promised.

A contractor warned that you needed a new roof and offered to arrange financing. But, he didn't say that the loan would put your home's equity on the line. The loan had extremely high interest rate, lots of points, a huge balloon payment and a credit life insurance policy. Now, you're about to lose your family's home because you can't make the payments.

Be careful selecting a lender the next time you need a loan, whether it's for buying a home, making repairs, paying off credit card debt or making major purchases. Some lenders don't have your best interest in mind. They want to cash on in your need. These predatory lenders typically offer loans with high interest rates, high finance fees and unnecessary charges for extras such as credit life insurance. The cost of doing business with these lenders is high. You could lose not only your money, but whatever you used to secure the loan, even your home. The lender benefits from high interest rates, fees and charges if you pay the loan. Or, the lender wins by foreclosing on your property.

A predatory lender may be a large company with a name you know. Or, it may be a small company or a loan broker you've never heard of. Predatory lenders target desperate, credit impaired homeowners with a considerable amount of equity in their home. Common targets are elderly, minorities and low-income homeowners. But, anyone can become a victim.

Common Predatory Practices

1. Charging high interest rates and/or undisclosed and /or improper fees.
2. Pulling a bait and switch, which happens when the lender offers one set of loan terms but than pressures the borrower to accept higher charges or changes the paperwork to higher terms at closing.
3. Arranging the loan so monthly payments are low with a large balloon payment due at the end of the loan.
4. Packing the loan with costly and/or unnecessary products, such as credit/life disability insurance.
5. Flipping, which involves repeated financing of the loan. With each refinance, the borrower is charged more fees and the loan amount is larger.
6. Misrepresenting or hiding critical loan terms, including failing to advise the borrower of his or her three-day right of rescission.

Finding a Reputable Lender

Do your homework as you search for a reputable lender. Ask family and friends for the names of lenders they've done business with and would recommend. Also, contact your better business bureau for a list of BBB members in the industry and to get business reliability reports. In addition, get references from lenders and check them out.

Keep the following things in mind as you shop for and deal with lenders:

1. Shop around for the best loan and compare annual percentage rates, loan lengths, monthly payment amounts, etc. Be wary of loan offers that initiated by the lender via unsolicited mail, telephone calls or visits. Avoid lenders who promise you can get a loan regardless of your credit.
2. Don't be swayed by high-pressure sales tactics.
3. Borrow only the amount you need and understand exactly how much the entire loan will cost. Don't agree to a loan if you don't have enough income to make the payments.
4. Beware of loans with one large balloon payment at the end.
5. Don't agree to a loan that includes extra products you don't want, such as credit insurance.
6. Walk away from the deal if your questions are not answered.
7. Don't deed your property to anyone. Reputable lenders rarely ask you to sign over your deed.
8. Consider consulting an attorney, a knowledgeable family member or someone else you trust to review the loan paperwork if you are unsure of some issues. Don't sign any documents you haven't read, don't understand or that have blank spaces to be filled in after you leave.
9. Remember you have the legal right to change your mind for any reason within three days of signing most loan contracts using your home to secure it.