Predatory Lending Practices and Scams for Savvy Borrowers to Avoid
There are different predatory lending practices and scams that aim to con consumers out of their money.
Signs and Red Flags of Predatory Lending
Some red flags indicate that certain loan providers use predatory practices. These include loan flipping, yield spread premiums, very high prepayment penalties and fees, and others. Inflated interest charges are one sign that you are dealing with a predatory lender. Some providers charge abusive rates that can be as high as 200 percent and even 300 percent. Providers also offer yield spread premiums to brokers who advertise loans with high interest rates. Steering and targeting are also predatory practices used by some lenders. Some advertisements claim that poor credit doesn’t matter, but this is a red flag, especially if a broker or loan provider tries hard to rush you into decision. Some issuers also offer adjustable interest rates that skyrocket over time. Make sure you ask about interest rate fluctuations and hikes. In some cases, the interest payments become unaffordable. Repeated refinancing is also a bad decision because it will add more debt. Borrowers lose a lot of money in fees, points, and other charges. To attract more customers, predatory lenders use aggressive advertising and sales tactics. They usually target vulnerable borrowers who need urgent cash and are already highly indebted. They often offer other products, along with the loan, for example, insurance policies with high premiums. In addition, predatory lenders often fail to disclose important information such as the cost of insurance policies, property taxes, penalties, and others. They hide information to make payments look low and affordable, which is often not the case.
Examples of Loans to Avoid
Some loans are best to be avoided because of the high fees and rates, including tax refund anticipation loans, car title loans, and overdraft and payday loans. A tax refund anticipation loan is one example of a short-term borrowing instrument whereby the interest rate varies widely. It can be as high as 700 percent. Customers borrow against their income tax refund to get access to quick cash. A car title credit is another product for customers who need urgent cash. This is a type of short-term financing with a repayment term of 1 month. Again, the interest rate can be extremely high. The problem with this type of financing is that borrowers are asked to use their vehicle as a guarantee for repayment. Overdraft and payday loans are two products for borrowers with tarnished credit. Some issuers even charge per day fees, including brick-and-mortar banks. Another option is to borrow funds against one’s bounce protection limit and yet another is to apply for a payday loan.
Scams to Avoid
Cons use different scams, abusive collection practices, and misleading sales pitches. Predatory lenders usually offer refinance, vehicle, and home equity loans. Con artists target borrowers with a history of credit problems. They use wording such as “limited offer”, “nothing to lose”, “instant decision making”, and “no upfront fees”. There are also advance-fee loan scams whereby providers ask for a fee in advance and then disappear. Upfront fees are actually illegal. In other cases, customers are asked to make a down payment. Some con artists contact victims over the phone and online and request information such as their social security number, bank account and credit card details, and others. This information is often used to write counterfeit checks. Con artists are not interested in the borrower’s credit status or payment history. Some lenders convince borrowers to wire funds and then use questionable practices. There are some red flags that help customers to identify a scam. For example, some providers require that borrowers wire funds to an overseas account. They usually advertise very low rates and a quick approval process. The interest rate is usually lower than that of credit unions and banks. Providers that contact customers many times, whether over the phone or by email, are often illegitimate. Con artists also offer a free period, for example, customers make no payments during the first 6 months or 1 year. Of course, they use a phone number that is difficult to track and a false address and business name. They use false loan applications and approval documents and often offer credit cards with attractive fees and pre-approved limits.
The problem is that advance-fee loans and other scams are often advertised through cable TV, radio, magazines and newspapers, and direct mail. The fact that illegitimate companies place ads in magazines and newspapers doesn’t mean that they can be trusted. It always pays to check the company’s details and record before making payment. It is risky to wire money through MoneyGram or Western Union, especially if you are asked to wire money to an individual. There are other types of fraud and scams to watch for, for example, charity and travel scams, employment and banking scams, and others. Other scams to be aware of include phishing and online trading scams, small business scams, and so on. The good news is that fraudulent schemes are not difficult to recognize because they follow similar patterns.
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