How to avoid predatory lending practices

If you’re in the market for a loan, you are probably aware that some products are better than others. However, some loans have such poor terms, fees, and interest rates that they are considered predatory.

What is predatory lending?

Predatory lending is pushing unreasonably expensive purchase loans or refinancing. You can avoid predatory lending by knowing which loans fall into this category, and by taking steps to qualify for a higher quality product. If you ever have questions about a loan – whether it’s one of ours or someone else’s – visit a branch and talk to us. You can also chat online with BALANCE – consultations with them are free for Patelco members.

Predatory lending practices and red flags

There’s some common red flags for predatory lending. Watch out for lenders that:

• Persuade you to borrow more than you can afford to repay
• Don’t give you enough time to review the contract
• Give you a reasonable interest rate but with the astronomical fees and charges
• Lie or neglect to tell you about the terms of the contract
• Falsify documents or ask you to lie on the application
• Talk you into a loan with an interest rate higher than you qualify for based on your credit score (if your credit score qualifies you for a loan at 4.50%, be suspicious of a lender trying to sell you a loan at 6.25%)

Tips for avoiding predatory lending

A primary defense against predatory lending is to become an informed consumer. Read all contracts carefully, paying close attention to interest rates and what can happen if you miss or are late on a payment. Look out for misleading marketing and high-pressure sales techniques too. Though these loans may be advertised as a way out of financial trouble, getting them often leads to higher and more expensive debt.

It is very important to know your financial limits, especially with mortgages. You may not only lose a lot of money, but also your home if you fall behind on your payments. Never let someone talk you into taking out more than you can comfortably handle.

Building a positive credit history is also key. You can do this by paying all your debt obligations on time, reducing balances on credit cards and personal loans, not closing accounts that you have had for a long time, avoiding excess credit applications, and having a mix of credit accounts (such as credit cards, charge cards, and installment loans). Once you’ve proven you can borrow responsibly, you increase your chances of being eligible for loans with low interest rates and excellent terms.

Other types of predatory lending

There are other types of predatory lending as well, and they are promoted to people with no or damaged credit who need money for emergencies. These loans come with exceptionally high interest rates and can feature terms that make repayment difficult:

• Payday loans – A payday lender allows you to borrow against your future income. You give them a postdated check for the amount borrowed plus fees, which is deposited if you do not pay back the loan. The APR (interest expressed as an annual percent rate) is usually well over 300 percent and can go much higher if you refinance the loan instead of paying it off as soon as it comes due. Having an emergency fund  can help protect you from needing a payday loan.
• Pawn shop loans – You are given a short-term loan in exchange for leaving a personal item, such as jewelry or an electronic device, as collateral. If you pay back the loan, including interest, on time, you get the item back. You may be able to renew the loan by paying the interest. However, if you fail to repay or renew the loan, your item can be sold. The APRs for pawn shop loans are typically around 120-240 percent, much higher than the rate charged on credit cards. Many pawn shops also charge additional fees for insurance and storage.
• Car title loans – Your vehicle secures this short-term loan, so if you fail to pay, the lender can claim it without having to sue you. While you typically have the option to roll the loan over, the interest rate is often 25 percent per month, which equals an annual rate of 300 percent. Having an emergency fund can help protect you from needing a car title loan – and from losing your car.

What to do if you suspect predatory lending
If you believe that a lender unlawfully changed the contract, mislead you, added products you didn’t agree to, or persuaded you to accept a loan that had worse terms than you qualified for, you can contact your state’s attorney general’s office as well as the Consumer Financial Protection Bureau at consumerfinance.gov or 855.411.2372.

Source: Broadridge Financial Solutions, accessed July 31, 2019.