Predator creditors are after you
Borrowing money in this economy is not easy. But even if you are desperate to get a loan, don't let your guard down. Predator creditors are on the loose.
These unscrupulous lenders prey on borrowers using deceit, manipulation, sales pressure and even fraud to get them to sign on the dotted line.
The hallmarks of a predatory loan are exploitation and entrapment: These sky-high interest loans target consumers who have little ability to repay the loan, such as the elderly, people with limited education, those with weak credit histories and other low-income groups, according to the Durham, N.C.-based Center for Responsible Lending, a nonprofit research group.
While predatory lending is often associated with payday loans and subprime mortgages, the practice can be found with any loan. And new schemes are cropping up every day -- online and off.
Predators of all stripes
According to the Center for Responsible Lending, predatory lending practices can happen in a wide range of loans including home improvement, auto financing, car title, tax refund anticipation and payday loans.
But don't be fooled into thinking that predators are lurking only in back-alley storefronts or on flashy websites. There is a growing trend among some large, reputable banks to offer high-cost, short-term "payday" loans as well, says Kathleen Day, spokeswoman for the Center for Responsible Lending. These loans are typically called "account advances."
"These loans can have an APR (annual percentage rate) in the triple digits," Day says, referring to the types of short-term, high-interest loans currently being offered by some banks.
For example, one bank's "checking account advance" loan charges $2 in interest per $20 borrowed (with a $35 late fee), which must be paid back within 10 days. Taking out a $400 loan will cost $40, which calculates to a staggering 365% APR.
"All high-cost, short-term loans trap people. Steer clear of these loans," Day says. "They are designed to make you come back over and over again for more loans."
Look for red flags
While borrowers should be wary of any short-term, high-interest loan, regardless of its source, long-term predatory loans, such as auto loans or mortgages, also can entrap the unsuspecting.
Tom Alexander, associate professor of finance at Northwood University in Midland, Mich., says predatory loans have recognizable red flags.
Be on the alert if the lender allows you to borrow more money than you can afford or asserts that bad credit isn't a problem, he says. Suspect a predatory loan if the lender asks you to fudge or make false statements on your loan application, asks you to sign blank documents or a document with blank spaces, or discourages you from reading the fine print, Alexander says.
Steve Wolf, certified fraud examiner and executive director of Capstone Advisory Group LLC in Washington, D.C., says borrowers should also be wary of any lender that:
Charges excessive fees or penalties if the loan is refinanced or payment is late.
Puts in fine print that the borrower cannot take legal action against the lender.
Adds unnecessary insurance or financial products to the loan.
Ask the right questions before signing
While your questions will depend on the loan product purchased, Wolf suggests these basic questions that you should ask the lender before you sign.
What is the actual rate of interest when all loan origination fees and prepaid interest is included?
What is the payoff period for the loan? (Six months, 10 years, 30 years, etc.)
When will the loan rate go up or reset?
When the loan resets, what will the payment be?
Are there any penalties for late or delinquent payments?
Do late payments trigger a higher loan rate for the remaining period of the loan?
Are there any refinance restrictions and fees?
Not only should you grill the lender, but you should also ask yourself some hard questions, says Alexander.
Can I afford to pay back this loan?
Is the length of time for the loan reasonable? For example, a 10-year car loan might not be reasonable.
Are my total loan payments more than 36% of my gross monthly pay? They shouldn't be.
What to do if you are caught in a predatory loan
If you realize that the loan form you have signed is predatory, there are some steps you can take.
The Obama administration's newly established Consumer Financial Protection Bureau is the place to launch a complaint about any predatory loans except those from auto dealerships, which are exempt from the bureau's authority.
"People should also complain to their state attorney general," says Day. If you suspect fraud, you may want to consult with a legal aid attorney.
"As (borrowers) become aware that they can take action against mortgage fraud and predatory lending and policymakers, consumer advocates and civil rights leaders take more action against the predators, more people will be protected from its burden," Wolf says.
However, launching a complaint may not immediately ease your pressing problem, which is a high monthly loan payment with unfavorable terms and/or an exorbitant interest rate.
For that, there is only one solution: "Do whatever you can to pay off the loan and get out from under it," Day says.