A predatory loan is one that has unfair loan terms or uses unfair practices to qualify you for the loan. If a lender uses deceptive practices to get you to take a loan that you do not want or cannot afford, it is also characteristics of predatory lending.
In general, predatory loans work to the benefit of the lender, but not the borrower. In fact, they often ignore the fact that the borrower cannot afford the loan. They also don’t focus on the fact that the borrower doesn’t understand the loan or its terms.
Keep reading to learn the characteristics of a predatory loan.
The Most Common Characteristics of a Predatory Loan
- Limited documentation – If the lender doesn’t provide you with the documentation necessary for you to understand the loan, it is considered predatory practice. The law requires lenders to provide specific documents within three business days of applying for the loan in order for you to make a good decision.
- False information – Lenders that provide you with false information or lead you to believe something about the loan that isn’t true is also part of predatory lending. Lenders are supposed to provide you with honest information regarding your loan so that you know the next steps.
- Charging excessive interest rates – All lenders tie your interest rate to your credit history and/or risk level. When a lender charges excessive interest rates because you are a high-risk borrower, though, it’s considered predatory lending.
- Charging excessive fees – You should find that most lenders charge approximately the same amount in fees, with a little room for differences. If you find a lender that charges excessive fees and tells you it’s because they are the only lender that will approve them, it’s a characteristic of predatory lending.
- Offering balloon payments – Balloon loans are very rare today. If you come across a lender that offers this option, it could be a predatory loan. Lenders encourage balloon loans so that when the time comes for the balloon payment, they can get the refinance business from you and charge even more fees and interest on the loan.
Characteristics of a Predatory Lender
While it’s uncommon to com across a predatory lender these days, you may come across one time and again. Here’s what to look for:
- Unlikely promises – If the lender promises you the world in exchange for high fees and high interest look the other way. If the lender tries to convince you that no one else will ever approve you for a loan, you should definitely find another lender.
- Rushing through the process – Lenders that don’t want you to realize what you are paying or agreeing to on a loan might rush you through the paperwork. Try to take your time and understand everything. If the lender rushes you through or doesn’t ask questions, look elsewhere.
- Blank documents – Sometimes predatory lenders will include blank documents in your paperwork, asking you to sign them and they will fill them in later. Never sign these documents as you have no idea what they might put on them.
Luckily, it’s not too common to come across a predatory loan today. As long as you know what to look for and ask a lot of questions, you should be okay. If you are ever unsure, get the advice of another professional, such as a lawyer or your financial advisor.