FEATURE ARTICLE: Are You At Risk of Predatory Lending?
Predatory lending is most commonly associated with mortgages, but it also affects consumers seeking other types of loans. Knowing credit and lending terminology helps to avoid misunderstanding or otherwise deceptive practices and a through list of these can be found on our website at www.dmcccorp.org. Click on “Educational Materials,” and then refer to the credit terminology in the educational handbooks.
What is predatory lending?
With millions of consumers hard hit by fallout of the sub-prime lending market, people are losing their homes and their investments because of predatory lenders, appraisers, mortgage brokers and home improvement contractors who:
- Sell properties for much more than they are worth by using false appraisals.
- Encourage borrowers to lie about their incomes, expenses or cash available for down payments in order to get a loan.
- Knowingly lend more money than a borrower can afford to repay.
Charge high interest rates to borrowers based on their race or national origin and not on their credit history.
- Charge fees for unnecessary or nonexistent products and services.
- Pressure borrowers to accept higher-risk loans such as balloon loans, interest-only payments and steep prepayment penalties.
- Target vulnerable borrowers to cash-out
- Refinance offers when they know borrowers are in need of cash due to medical, unemployment or debt problems.
- “Strip” homeowners’ equity from their homes by convincing them to refinance again and again when there is no benefit to the borrower.
- Use high-pressure sales tactics to sell home improvements, and finance them at high interest rates.
What tactics do predators use? Predatory lenders or investors insist that they are your only chance of getting a loan or owning a home.
Take your time to shop around and compare rates, prices and homes. Buying a home will be one of the largest financial activities a person can make and will require much deliberation. Here are some signs that you could be dealing with someone who is not considering what is in your best interest:
- The house you are buying costs a lot more than other homes in the neighborhood, but isn’t any bigger or better.
- You are asked to sign a sales contract or loan documents that are blank or that contain information that is not true.
- You are told that the Federal Housing Administration insurance protects you against property defects or loan fraud; it does not.
- The cost or loan terms at closing are not what you agreed to.
- You are told that refinancing can solve your credit or money problems.
- You are told that you can only get a good deal on a home improvement if you finance it with a particular lender.
- Don’t take the lender’s word for it that you qualify. Scrutinize your finances to make sure that you can repay the loan.
- Watch out for prepayment penalties. Occasionally, a respectable lender will charge a fee for paying off a mortgage early – when the house is sold, for example, or when the borrower wants to refinance. But a predatory lender charges excessively large fees to pay off a mortgage early. If those fees are on top of balloon payments and mortgage life insurance, you’re being set up to have your house repossessed if you can’t make the payments.
- Don’t sign forms with blank lines or spaces. If you sign blank documents you run the risk of somebody adding costs and fees you never agreed to.
- Make sure the lender signs and dates all papers. Get your own copies of all papers and immediately confirm that the information is correct and that it matches what was promised to you.
- Pay attention to fees and points. A lender might offer a good interest rate, then charge thousands of dollars in fees and require you to pay an excessive number of points.
- Don’t be intimidated by jargon. If you don’t understand, ask the lender or refer to the credit terminology section in the educational handbooks online at www.dmcccorp.org.
- Request references from people who have borrowed from your prospective lender.
- Hire a personal attorney to be present with you, or to review any documents before signing them, if you feel that the lender may be taking advantage of you.
MONEY SAVING TIP: Low cost ways of making extra money Sell your old stuff, like CD’s and books on eBay and Amazon.
- Turn your hobby into a business. Pretty much anything you do can be turned into a business of some sort.
- Sign up with an online survey company like Survey Spot.
- Become a mystery shopper.Not only can you make some extra money, you might get some free stuff as well.
- Have a yard sell.
- Start a blog and put Adsense on it. You might only earn 4 cents a week, but it’s something.
- Become a consultant. Do you know a lot about a particular skill? Put that knowledge to work by helping others.
- Do freelance work on the side. If you’re a good writer, photographer, artist, or programmer you can make some extra money by selling your talent to companies.
- Start an errand Service. Offer to pick up groceries or dry cleaning for others.
- Waiting service. People these days don’t have time to wait on the plumber of cable guy. Charge by the hour to do the waiting for other people.
DO YOU KNOW….If That Deal is Really a Deal?
Have you ever been enticed by a great offer? It is particularly alluring if the product being sold is something you really need. Before you sign on the dotted line, make sure you review the fine print first. Understanding the terms and conditions, billing policy and disclosure statements are imperative to benefit from these types of offers. Otherwise, that special promotion you signed up for may not be a great deal after all.
A good way to understand what you are getting yourself into is to examine these offers and what they really mean. Take for example, the popular promotion given by furniture and home good stores for “no payments, no interest until the year 200X.” It may seem like a great deal, but careful examination could make you think twice. A few questions that may help you decide are:
Does interest accrue until the promotion expires? How high is the interest rate and is it a fixed rate? What does the interest rate increase to if you miss a payment? Will the interest be added if the item isn’t paid in full at the end of the promotion? Is the savings that you are supposed to receive lost in the financing deal?
Fortunately for you, it is the law to disclose all of the financial terms and conditions along with billing methods. You will be well informed if you read and understand the contractual agreement. Most importantly, ask a customer service representative to explain anything that is unclear to you. Especially inquire if you must qualify for the offer. They may refer to this clause as, “other details may apply.”
Furthermore, you want to make sure that the “deal” is actually a deal. If you can find the
merchandise for less money somewhere else, why even bother? Some retail stores may honor their competitor’s promotions. Always make sure you know who else is selling the same product and at what price to really get the best deal.
Let us suppose you visit the local furniture store and get excited about a living room set which will cost you close to $3,000. You plan to take full advantage of their offer and make no payments for one year. Once the statements arrive you have planned to pay $75 per month. The chart below illustrates how long it will take you to pay the furniture back and the actual cost of your furniture.
You spent $3,000.00 on November 1, 2009
You plan on paying $75 per month starting November 1, 2010
Interest Rate: 23.99%
Monthly Payment: $75.00
Total Interest Paid*: $3,091.88
Duration of Loan: 82 months (6.8 years)
Total Paid: $6,091.88
Monthly Payment: $100.00
Total Interest Paid: $1,626.06
Duration of Loan: 47 months (3.9 years)
Total Paid: $4,626.06
*The above example assumes that interest is not accrued during the year of the promotion.
The ideal situation would be to submit payments before the offer expires and you are required to make payments. Unfortunately, this option is not what makes these promotions popular.
Finally, do not be timid if you feel that you are not getting the best service from a store or financial institution. Speak up. Other businesses will be happy to accommodate you and perhaps match an offer you have previously explored. Whatever decision you make in regards to credit, always be certain that the monthly payments will fit into your budget. Make sure that you have explored all of the other financing options available and that the one you choose is the best for your lifestyle.