Having a home of their very own is a life-long dream for millions of Americans for a lot of great reasons. First of all, there is no landlord to deal with whenever a repair needs to be done. Any outside service can be called in at any time to get things fixed fast. There are also no rules or restrictions as far as pets, roommates, or decorating. And a home that is owned can also be passed on to loved ones later on. Because of this, those who are desperate enough will do anything to get one, even taking on debt from a predatory lending company. This usually happens to first-time home buyers who don't understand what they are getting themselves into. So to help, this article will discuss some common predatory loan practices and ways to avoid them.
What is Predatory Lending
Loan companies and banks don't let people borrow money out of the kindness of their hearts. They do it to make money. That is why they charge interest and other fees. Normally, the fees and interest are kept at reasonable prices that people can afford. All a borrower has to do is make their loan payment each month until the loan is paid off. For a home, this might take up to 30 years. But when predatory lending practices are being used against them, things don't work out as well. That is because predatory lenders don't care how much money a person loses in the deal. Unfair terms, coercive tactics, and ridiculous loan payments make the loans impossible to pay off, so the lender takes all the money that they can get from the borrowers. Then, they take the houses from them to resell to other victims.
Types of Predatory Loans
Because there are so many schemes that predatory lenders use to trap borrowers, it is crucial to know what to look out for. A few of their common traps include:
Loaning More Money Than Needed
Initially, this type of loan is very tempting. The lender offers several thousand dollars of extra cash as some type of appreciative “bonus” for the borrower. But taking more cash than the home costs means that more money has to be paid back. And it also increases the monthly payments that are due.
Risk-Based Fees and Interest
Those who have poor credit or a limited income often struggle to get any loan. And predatory lenders know this. So they offer them loans with high interest rates and annual fees, which get tacked on to their total loan amount. Over time, the loan amount grows because very little, if any, of the payments that are made goes towards the loan principal.
Sometimes, this type of predatory lending practice is called “surprise payments.” A person is sucked into a loan with promises of steady, low payments that they can afford. But after making so many of them, they receive a bill for a much larger amount than they can afford. And if they don't pay it, their loan is considered delinquent.
Predatory Loan Bundling
Once a person applies for a loan for a house, they get offered loans for other major purchases, such as cars, boats, or home improvements. But if they take the extra loans too, the total of all of them often exceeds what they can realistically afford on their income. So they have to pick and choose which ones to pay each month. The predatory lenders don't mind this though because they can tack on extra late fees and penalties.
First slow down! Talk to friends who have gone through the process. Although it might be tempting to rush into the lending process, so a home can be purchased faster, this is exactly what predatory lenders want. That way, they can hide unfair rules and restrictions in all of the fine print that a borrower signs. The best thing to do is to take the time to read everything beforehand. Since this might be several pages of legal terminology, it may also be helpful to consult an attorney if help is needed to understand it all. If the loan conditions are or seem less than favorable, just stop and shop. Borrowers should shop around until they find a lender that is up front with you and will take the time to go over the all details of the loan with you. Never sign anything until all your questions are answered.