Whether you’re tied up in knots in a good way over 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 understand all the terms and conditions of the financial obligation you are considering.
Let’s take a look at the types of predatory lending practices that are out there, so you don’t fall victim to a financial crisis.
What Is Predatory Lending?
Predatory lenders take advantage of a 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 unreasonably high fees, that are not beneficial to the consumer.
Predatory Lending Practices
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, their expiration date, and what, how, and when the new interest rate will be calculated and publ
- Balloon payments: Large payments at the end of a loan term can hide the true cost of your purchase, initially making loans seem 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: Predatory 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.
- Payday loans: Payday loans are some of the most notorious examples of predatory lending practices. These predatory 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 require 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. This type of lending is not legal in all 50 states. 16 states, in addition to Washington D.C., prohibit payday lending.
- 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.
- Online only lending institutions: Although these institutions may be a convenient way to manage finances on your own, and a lot are reputable, you want someplace you can physically go to if you have questions or complaints.
There are many other lending scenarios you should watch out for. Some of these scenarios include if the lender states they don’t need to check your credit to receive a loan. This shows they do not care in your ability to repay. Fee stacking can occur or refinancing/second loans. If a lender requires mandatory access to your bank account, they can take directly from your account if you fail to pay timely. This can cause overdraft scenarios and more fee debt — this time from your own financial institution.
Why Should You 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. Credit unions, specifically, are insured by the NCUA, which makes them a safe and secure place to invest your money. Since credit unions are not-for-profit, any earnings translate into rates that members can afford 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. Better banking the credit union way — PenFed.