Knowing these nine predatory lending practices to watch out for can help you to choose a responsible lender.
Encouragement to include false information. If a lender has changed any of your income or expense information or leaves your income blank, do not sign the loan application.
Incomplete loan documents. Never sign a loan document with missing information. Don’t work with a lender who asks you to sign a document that is not completely or accurately filled in.
“Bait and switch” sales tactics, when a lender makes promises in order to make the sale, but then backs out on the promises after the sale. To avoid this, it’s critical to carefully read and understand the agreement before you sign. Question anything in the document that is not consistent with what you were told. Don’t sign the agreement if anything in it is unclear, incomplete, or not as promised.
Equity stripping or skimming, also known as foreclosure rescue. Predatory investors or small companies target low-income home owners facing foreclosure and trick them into signing away their equity and property. For example, they might bury a document in a stack of loan papers that signs over ownership of the home to the loan company, or even forge the homeowners’ signatures.
Loan flipping. Refinancing a loan can be a responsible and useful financial strategy, but loan flipping is when a lender persuades a borrower to repeatedly refinance a loan, often within a short time frame, charging high points and fees each time. This is not in your best interest because it costs you money and postpones the loan principal from being reduced.
Some predatory lenders may charge you up to $1,000 for the “privilege” of paying your loan biweekly. Although this can decrease the total interest you pay over the life of the loan and the time it takes to pay in full, such accounts can often be set up for free or for a one-time fee of a few hundred dollars.
Required (or requested) deed signing. If you are behind on your mortgage payments, a predatory lender may offer to help find new financing and ask you to deed your property over to the lender as a temporary measure to prevent foreclosure. But then the promised loan never comes, and the lender who made you the offer owns your home.
Advertisements promising “No Credit? No Problem!” These are often warning signs of scams. Consumers responding to such ads are guided through a phony application process and may even receive fake loan approval documents. To receive the approved loan, they are told to pay money up-front for fees or services — and instead end up losing their money — and in some cases, their homes.
Promises to refinance the loan to a better rate in the future. No one can make you that promise. Instead, ask the lender if there is anything you can do to get a better rate now.
Note: Balloon payments are large, lump-sum payments due at the end of the term. Before you sign a loan agreement that requires one, make sure you fully understand and are prepared to pay it.
Learn more about loans in the topic Using Credit to Your Advantage.
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