The dangers of predatory lending and how to avoid them
Financial problems are unavoidable. Sometimes the money we’ve saved up isn’t enough when we have to make big purchases or to cover for emergencies. Taking out a loan sometimes becomes a necessity when specific needs arise.
However, some lenders turn other people’s misfortune into opportunities. By taking advantage of the desperation of the unfortunate, lenders place more burden on them rather than financial aid. Unfortunately, quite several numbers of people fall into these types of predatory lending, where they pay much, much more than what is necessary.
What is Predatory Lending?
Predatory lending is a type of lending tactic that takes advantage of debtors, including terms in contracts that heavily favours the lenders. These deals ignore and impede debtors from being able to pay off their debt quickly. This type of tactic feeds on lenders who are not familiar with the ins and outs of the lending process.
Anyone can be a victim, though predatory lenders have a specific group of people they usually target. Minorities, the elderly, individuals under the poverty line and the less informed are prone to these types of lending tactics. These lenders would present their loan options to unsuspecting individuals, disguising as reputable lenders to save them from their financial worries. These loans will worsen a borrower’s financial situation instead of improving it.
Any type of loan can be predatory and can put a borrower in debt for a very long time. From mortgage loans to personal loans- as long as lenders choose not to disclose information, charge high-interest rates incorrectly, or commit any ill-willed practices to get more money out of your pockets, then they are predatory. Their financial aid offers little to no relief to the debtor’s financial status.
How do You Avoid Predatory Loans?
Here’s how you can avoid predatory loans;
Read the Fine Print
Before signing any contracts signifying your agreement to the deal, you must read and understand the clauses included in the contract. Look for any loopholes or advantageous statements, and make sure that it will be addressed. If any terms don’t make sense or seem not to exist at all, don’t be afraid to point it out.
It’s also essential to study each clause regarding repayment fees, loan period payment, and the likes. Will they penalize you for paying your loan off early? Is the interest rate fixed or variable? How long do you have to pay off the debt? By doing this, you wouldn’t have to agree to bad deals and end up finding yourself in a worse situation than you were before.
Being knowledgeable about how the process works is the best thing you can do to make sure you don’t fall into predatory tactics. This includes knowing the difference between fixed and variable rates, the benefits of interest-only loans, potentially dangerous requirements such as prepayment penalties, mandatory arbitration, and others more.
Knowing your rights as a borrower will also serve you well during the process. Don’t believe them when they say they’re the only lenders willing to give “good” deals. And don’t ever let any lender make you lie on contracts, especially mortgages.
Aggressive Sale Tactics are Major Red Flags
Seeing loan advertisements on TV or having someone come up to you for loan options is part of a marketing strategy these corporations do to have more people borrow from them. However, if these become borderline intrusive, such as pushing you to get a loan or force you to apply through phone, mail or email, then that may be a predatory tactic.
Unlike predatory lenders, reputable ones won’t spam your email with offers or bother you almost every day with their loans. They present their loan options and wait for you to come to them when you need their services. Most importantly, they don’t focus on vulnerable people as their target market.
Know How Much You Can Pay
If a lender is trying to rope you into loans that’s too much for your current income, then don’t continue dealing with them. That’s why before you consider applying for one, calculate your income and find out how much debt you can manage. To do this, find your debt-to-income ratio (DTI) by dividing your monthly payments with your income. Your loan shouldn’t go over 36% of your DTI.
Whether you’re planning to apply for a loan or do balance transfer loans, you must do a background search first on institutions you’re considering. The Consumer Financial Protection Bureau has a database that keeps records of lenders that have received complaints in the past. You won’t have any trouble if you only choose to apply to institutions with credible backgrounds and good ratings.
Getting swept with financial problems can be frustrating. Thankfully, though, loans exist to help us get back on our feet. However, we must make sure that the lender we choose wouldn’t take advantage of our vulnerable situation. Being observant and knowledgeable is key to avoid falling into the trap of predatory lending.