Ravi Chandran
One of the dangers facing consumers with bad credit comes from predatory lending. Predatory loans are given by lenders who try to primarily take advantage of people that have trouble borrowing from a legitimate lender.
By: Hitesh Khan/
Predatory lending refers to unethical practices conducted by lending organizations during a loan origination process that are unfair, deceptive, or fraudulent.
One less contentious definition of predatory lending is proposed by an investing website as “the practice of a lender deceptively convincing borrowers to agree to unfair and abusive loan terms, or systematically violating those terms in ways that make it difficult for the borrower to defend against.
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To avoid becoming a victim of predatory lending:
- Stay away from loans offered through short messaging service or telemarketing calls.
- Beware of loan offers made by betting companies in conjunction with betting services.
- Beware of lenders or brokers who guarantee you a loan regardless of your credit history or rating.
- Shop around. Interest rates and fees vary widely among lenders. Don’t assume that you won’t qualify for a loan from a traditional lender. Those loans are less expensive than subprime loans.
- Be suspicious of anyone who tries to pressure you into a loan before you are ready.
- Read the entire loan application carefully before signing. Do not sign a loan form with blank spaces.
- Make sure that you have received, read and understood all required disclosure documents before closing.
- At closing, make sure the loan terms have not changed from what you were told before and that there are no additional fees you didn’t know about.
- Have a legal firm review the documents before you sign.
- Ask about fees and points. The interest rate is not the only important term of a loan. A loan with a low interest rate but high fees and points may cost you more than a loan with a higher interest rate and lower fees.
- If you are considering a loan with a variable interest rate, make sure you understand what conditions will affect a change in your rate, and the amount your rate could go up or down.
- Watch out for hidden terms, such as prepayment penalties (fees you will have to pay if you pay off your loan early) and balloon payments (large payment due at the end of your loan).
Predatory lending often target elderly and low-income consumers, people with bad credit and those who are unfamiliar with home loans and mortgages.
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While people with a good credit score have more options when borrowing money, those with bad credit or who fall into one of these categories tend to have fewer choices. As a result, they may be susceptible to offers from predatory lenders. However, predatory lenders do not offer access to money at fair rates with reasonable rates and terms.
Instead, their offers generally involve incredibly high interest rates and fees, as well as unnecessary costs and unaffordable repayment terms. The offers from such lenders may even be illegal.
Consumers should be careful any time they are offered “bargain loans,” deals that promise having no credit is no problem, and offers that are only said to be available for a short time.
Borrowers should question whether they are encountering predatory lending if they feel pressured, and if they are promised next-day approval or “guaranteed” low-interest loans.
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Instead of rushing into a loan agreement, consumers need to make sure they understand the terms of any loan before agreeing to borrow, and check that what they are asked to sign is the same as what they discussed with the salesperson.
Consumers with bad credit should do their homework to make sure they are not dealing with an illegal predatory lending agent. To do this, they can request references from the lender and check them out. Separately, it is worthwhile to compare the lender’s rates and total costs to those offered by other lenders and local banks to determine if they are in line with what else is out there.
Specific examples of illegal predatory lending scams include loans that require advance fees. It is against the law for anyone to request or accept payment for their services before the consumer actually gets the loan or credit.
Regardless of how much of a financial crunch you are in, you should always shop around different moneylenders for the most favourable terms. You should not rush into and commit yourself to a loan until you are satisfied with the terms and conditions.
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