What is Predatory Lending?
What is Predatory Lending?
If you haven’t seen the 1987 cinema classic, Predator; my friend, you are missing out!
Let me give you a brief synopsis of the movie in 7 points…
1) Major Allen Schaefer a.k.a., “Dutch” is played by Arnold Schwarzenegger
2) He and a small group of soldiers enter a remote jungle to find a presidential cabinet minister whose helicopter crashed in this area (what a high ranking public official is doing in the remote jungle is beyond me)
3) There is a “creature” watching them who apparently has infrared vision
4) The “creature” doesn’t like weapons and can’t see you if you’re covered in mud
5) The creature is, spoiler alert, an alien
6) The alien dies
7) Dutch defeats this alien beast and everyone lives happily ever after…Until Predator 2 is released in 1990.
I bet you’re wondering what this has to do with financial education. Well, much like the “creature/alien” in this movie, there are predators out there that are after your hard earned dollars. They can turn any personal finance goals, into disastrous failures. Don’t fret! We have some ways you can be just like Dutch and defeat this monster known as predatory lending.
First, what is predatory lending?
Predatory lending is the unfair, deceptive, or fraudulent practices of some lenders during the loan origination process. In other words, a lender will use wrongful tactics to get you to take out an unfair loan.
Here are the tell tale signs that you are being hunted by predatory lenders:
1) Inflated fees and cost. The lender is charging you application fees, appraisal costs, and other “loan fees” that are much higher than other lenders. These lenders won’t verbally tell you about the fees (which honest lenders do). They instead hide it in the fine print and hope you don’t take the time to read it.
2) Push for “credit insurance”. You will be told that credit insurance will protect your loved ones from having to pay back your loan in the event of your death. In most situations, when you die, creditors cannot come after your family for the repayment of your debt. (It’s always best to speak to an attorney about the assets a creditor can come after to pay owing debts).
3) Risked-based pricing. Almost all reputable lenders do look at your credit history and your ability to pay back a loan. However, bad lenders will purposefully reach out to individuals who have poor credit history and say they can offer you a loan when no one else will. They then charge you outrageous amounts of interest and fees, saying it’s because you’re a “risk” and they need to be able to recuperate their money, if you ever default on the loan.
4) Negative Amortization. The lender will give you a large loan and tell you the minimum payment is insanely affordable. Too good to be true? YES! They have set the payments so low that it won’t even pay towards the principle (the original amount you borrowed). This means you’re only paying towards the interest and you won’t pay off the loan in the time they’ve set. In turn, they can charge you fees and higher interest because you’re considered past due.
5) Abusive Prepayment Penalties. Creditable lenders are okay with you paying off your loan early. It means they’ve recuperated the loan dollars they’ve given you and they still received some sort of interest income. An abnormal lender will put a clause in the small print saying that they can charge you a fee for paying off you loan early. NOT NORMAL!
So now that we know what the predator looks like, let’s talk about ways you can protect yourself.
1) DO NOT SIGN ANYTHING UNLESS YOU’VE READ THE ENTIRE DOCUMENT. This may seem like common sense, but predatory lenders will put very fine print in their contracts in the hopes that you will not read it. If you don’t want to read the entire loan document, hire an attorney who will read the document and give you advice on the contract.
2) Cover yourself in mud…figuratively. Put yourself on the National Do Not Call List (www.donotcall.gov). In addition, decline to receive any promotional emails when you’re online searching for lenders. By doing this, you’re protecting yourself from a predator.
3) Research, research, research. Learn about the lender’s history in the financial world. By entering the organizations name in any search engine, you should be able to see news, history, and other information about the lender and their practices
4) Be wary of lenders who approach you. Now, we’re not talking about receiving a flyer in the mail from your financial institution. That’s normal. By being a customer or member of a bank or credit union, you may be on a mailing list to receive information about products or promotions they are offering. What I mean is a lender whom you don’t have any relation with will randomly call, send you large amounts of mail, or worse…come to your door. If they call, say you’re not interested and ask to be removed from their call lists. If they mail you information, call them and ask to be removed from their mailing lists. Or you can download a junk mail manager app such as Paper Karma®. You take a picture of the junk mail, and the app will notify the sender that you’d like to be removed from all mail correspondence. And of course, if a lender comes to your door, don’t answer.
5) Trust your senses. If you’re getting a bad feeling about a situation with a lender, you’re probably right. Remember, you are not on the hook for paying any type of loan unless you’ve signed on the dotted line.
All in all, when you’re looking for your next mortgage loan, or buying a new car, ask yourself, “What would Major Dutch do?” Take the time to read the loan contract. If you don’t understand parts of the contract, ask questions. Do your research on the financial institution. Lastly, trust your gut feeling. Those predatory lenders are out there and they don’t care how your situation will end. All they care about is capturing their prey, your money!