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Keep It Safe

How to avoid loan scams

You may have heard about predatory lending on the news.  The following are tactics that can be considered predatory:

• High-pressure and misleading sales pitches
  
• Excessive fees and interest rates beyond what is necessary to cover the risk and make a profit
  
• "Packing on" or requiring unnecessary products that are included in the loan balance.
  
• Large prepayment penalties that are intended to trap the borrower in an unfavorable or unaffordable loan
  
• Payments that increase over time and have unrealistic repayment terms
  
• Loan flipping or frequent refinancing with fees folded into the loan balance that results in rising loan balances and decreases the equity in your loan
  
• Aggressive and abusive collection practices

Predatory lending takes many forms.  Abusive practices can occur in the mortgage, home equity, credit card, auto lending and payday lending markets.

Most of the known abusive practices occur in home equity and refinance loans.  Predatory lending tends to occur in low-income neighborhoods, particularly those with a large number of elderly or minority homeowners.  Most of the problems occur with financial institutions that are not federally-regulated, such as finance companies.

Predatory lending, especially refinance and home equity, often affects the subprime market since these borrowers may have fewer options for getting credit and are often less financially sophisticated.

Subprime lenders provide loans to borrowers with credit history problems.  However, subprime lenders charge higher interest rates and loan fees to offset the higher costs related to lending to borrowers with credit history problems.

Subprime lending can be beneficial, if performed in a fair, reasonable and legal manner.  It can help serve a traditionally underserved population.  If the borrower needs money, has had credit difficulty in the past or is currently too deep in debt, a subprime loan may be the only alternative available.

Most predatory loans are made to subprime borrowers, but not all subprime loans are predatory.

How to avoid predatory loans:

• Pay your bills on time to ensure you have a good credit history.  Make sure your credit history is accurate by reviewing your credit report every year.
  
• Be an informed consumer.  Make sure to shop around for the best deal.  If a lender is unwilling to give you the information you need to comparison shop, you probably don't want to do business with him or her.
  
• Be careful of lenders who tell you they don't care about your credit history or how much you earn.  Many of these places charge higher interest and higher fees.
  
• Don't respond to advertisements that make lending sound cheap and easy.
  
• Be careful of home improvement contractors that promise to get you a loan.
  
• Most credit insurance is optional.  Lenders cannot require you to purchase credit insurance from their company.
  
• There may be better alternatives to credit life insurance, such as a life insurance policy purchased separately.
  
• Ask friends, family and credit counselors for advice before applying for a loan.  Take someone along with you when you talk to your lender.
  
• Take your time before deciding on the best loan or lender.   Don't let lenders pressure you into a decision before you are ready.
  
• Keep copies of what lenders give you.

If you think you are a victim of a predatory loan, contact an attorney. Most communities have legal offices that provide free legal services to individuals with limited income. Look in the community services pages of your phone book or look in the white pages under "Legal Services of..." for the phone number of the local program.

The American Bar Association has a directory of pro-bono programs, or volunteer lawyer programs. The programs use local lawyers who have agreed to provide free legal services. The following link can help you find a program in your area: www.abanet.org/legalservices/probono/directory.html

Finally, be aware of the following loan offers:

• We will loan you up to 125% of the value of your home:   It can be dangerous to borrow more than your home is worth.  If you stop making payments, you can lose your house and still owe money.
  
  
• Incredibly low monthly payment:  There is no disclosure as to how the lender intends to calculate monthly payments.  There is a possibility the lender might have you pay only interest and not the principal, so you'll never pay off the loan.
  
  
• No upfront fees:  Be careful of loans that promise no upfront fees.  This does not mean there are no fees.  Many times, there are expensive fees added on to the cost of the loan and you will pay interest on these loan fees.  This can be very costly.  For example, if a $5,000 loan fee is added into the amount you borrow, you are paying $5,000 plus interest on the $5,000 over the life of the loan.
  
  
• Even if you have a bad credit history:   Beware of lenders who promise you loans even if you have a bad credit history.   If you have a bad credit history, you will most likely pay higher interest rates and more expensive loan origination fees.  All lenders take your credit history into account.  Some predatory lenders have been known to target high-cost home improvement loans to low-income homeowners.  Predatory lenders knowingly make loans to homeowners that cannot make the monthly payments.  They would rather foreclose on the house and take the equity.
  
  
• It's free and you have nothing to lose:   If it sounds too good to be true, it probably is.  Even though the initial loan evaluation is free, there are other ways predatory lenders will take money from you.   There might be hidden fees.
  
  
• Act now, this is a limited time offer:   Beware of "limited time offers."  Many predatory lenders try to pressure you into acting fast, even though you are not comfortable with the loan conditions.