They bait and switch tactics, and usually will advertise enticing interest rates that are impossible to resist. Sometimes, these immaculate rates do exist for a tiny select fraction of the population with nearperfect credit scores. The lender advertises these rates knowing fully well that whenever a potential borrower enquires about them, it is impossible to fit into that category. If a rate sounds too good to be true, it probably is.
Restrictive early payoff penalties are common as lenders want assurance that they will make their money in interest for the whole loan period, should the borrower decide to pay off their loan before it is due. An abnormally high prepayment penalty, one that greatly exceeds the amount of interest one is left to pay, is a good indicator of predatory lending
Negative Amortization where a borrower takes out a loan with low monthly payments. Good as it may sound, the problem that arise is that the monthly payments are too low to cover even the interest. The unpaid interest gets packed onto the principle balance and the amount owed exponentially increase over time, a clear sign that something is wrong when paying down debt leads to more debt.
Balloon Payments where payments start small and increase incrementally as time goes by. This is not always a sign of predatory lending. It may be fair or wise practice if the borrower expects his income to increase enough to keep up with the payments. But as the borrower treads into murky waters, the lender does not bother to verify his income at all, even if one falls off the deep end when his payments skyrocket at a rate the income cannot keep up with.
Spotting Predatory Lenders
After knowing the forms of predatory lending, it is time to spot the potential signals of predatory lending:
Predatory lenders make the borrower have a feeling of being rushed, it is common knowledge the lender should take the time to inform a borrower about the obligations he is signing on to. If the lender is rushing one through the paperwork there may be something in it, he or she doesn’ t want him to see.
Loan offers from unlicensed company as an unlicensed loan is an illegal loan. They’ re often set up online or by overseas lenders with immunity from local law. There is no recourse to take if one falls victim to an unlicensed lender.
Leaving blank spaces in documents which are supposed to be filled later by the lender is a trap. As a borrower one should not sign documents that contain blank spaces.
Including mandatory arbitration clauses is a sign for trouble, since mandatory arbitration clause strips the borrower of the right to seek justice before a court, should there be any wrongdoing on the part of a lender. Instead, the dispute is settled by a private arbitrator, whose decision cannot be appealed.
The Way Out For Victims
The last question then is so, if one is a victim of predatory or illegal lending practices, what can he / she do about it?
Right of Rescission: the borrower can seek the right of rescission from the courts if the lender failed to provide such a mechanism.
The borrower can seek to refinance the loan, by finding a reputable lender willing to refinance the loan. If one can refinance the loan, the borrower can drop the predatory lender by making sure not to replace one bad loan with an equally bad loan. It is worthwhile for one to take good time when searching for a new lender and do proper research.
Seek the services of a credit counsellor since counseling is a service that provides help with budgeting, solutions for becoming debt free and tips to borrowers to successfully manage their money. They provide debt solutions, are a good place to increasing lenders financial literacy, and can give advice on whether the loan options they’ re considering are a deal too good to be true.
It is a known fact that predatory lenders entice borrowers with rates that are a little too good to be true. Or they will disclose as little of the loan’ s stipulations as possible. In short, they will do whatever they can to disguise a bad deal as a lucky break, it is up to the borrower to take precautions no to fall prey to such type of lending.
Wasilwa Miriongi is a Certified Credit Professional currently working as the Managing Director, Del Creder Credit Management Limited. You can engage him on this or related matters via email at: WMiriongi @ gmail. com.