Don’t Fall for Predatory Lending Schemes

Posted May 18 2016
by PenFed Team
couple at computer looking concerned

Whether you’re tied up in knots in a good way over pulling the trigger on that big purchase you’ve always dreamed of making—or you’re tied up in knots in a bad way over sorting out a financial emergency, choosing how and where you want to secure your financing is an important decision to make. Do your research, choose a quality lender, and make sure you understanding all the terms and conditions of the financial obligation you are considering.

So that you do not fall prey to unscrupulous predatory lending schemes, let’s take a look at the type of predatory lending practices that are out there.

What Is Predatory Lending?

Predatory lenders take advantage of the consumer who is not knowledgeable regarding the process of borrowing money. They prey on misinformation, lack of awareness, and an individual’s eagerness to quickly resolve a financial matter. The lure of securing fast and easy financing allows predatory lenders to offer financing, such as higher interest rates and exorbitant fees, that are not beneficial to the consumer.

Payday loans are some of the most notorious examples of predatory lending programs. These lenders focus on lending small amounts of money, easily and quickly, at a higher rate of interest. The repayment terms of a payday loan generally requires the loan to be repaid when the borrower receives their next paycheck. Some lenders may require the consumer to pledge their car or home as collateral to secure the payday loan—giving the lender the opportunity to repossess the property if the loan is not repaid in a timely manner.

Types of Lending Schemes

If the terms of a loan sound too good to be true, they probably are. Don’t get taken in by these common predatory lending schemes.

Bait-and-switch schemes. Lenders pull you in with great terms or interest rates, but end up offering you another. A consumer needs to be attentive to low introductory rates and their expiration date and what, how, and when the new interest rate will be calculated and published.

Balloon payments. Large payments at the end of a loan term can hide the true cost of your purchase, making loans initially seem much more reasonable than they are. Shockingly large balloons could force you into refinancing just to handle the balloon payment.

Equity stripping. In a practice known as equity stripping, lenders approve you for a home equity loan—even when it’s apparent you would have trouble making the required payments. Then if you do miss payments, you risk losing your home to foreclosure.

Loan flipping. Lenders “flip” your loan by refinancing it one, or even multiple times, forcing you to pay unnecessary loan fees, points, refinancing fees, and prepayment penalties.

Negative amortization. Lenders set up loan terms and payment structures that make it difficult, if not impossible, to pay down the principal balance. The payment usually covers the accrued interest; however there are programs in which all the accrued interest is not paid and is added to the principal balance.

Online payday loans. The Federal Trade Commission (FTC) has sued several online payday lenders for illegal practices associated with these loans; including lying about the cost of the loan, requiring permission to allow the lender to make automatic bank withdrawals from borrower accounts, and threatening to sue or have borrowers arrested for falling behind on payments.

Packing. This practice “packs” your loan with unnecessary services, such as credit insurance and other hidden fees. With packing, the borrower is made to believe the additional coverage or fees are required on the loan to qualify for the financing.

Why You Should Consider Financing With a Credit Union

Whether your purchase or life event is a big decision—or a small one, choosing to secure your loan financing with a credit union makes good sense.

Credit unions generally offer fewer or no fees, better rates, and more personalized service than banks. Additionally, credit unions are insured by the NCUA, which makes them a safe and secure place to invest your money. Credit Unions are not-for-profit and can afford to offer best rates and excellent member service.

With a full range of quality financial products and services available to its members, PenFed Credit Union is a good place to begin your search. A trusted financial institution that’s been lending since 1935, visit PenFed today.