If you pay attention to the news, you’ve probably heard of predatory loans. These loans include terms and fees that may be misleading to borrowers. In the worst cases, they can cost thousands of dollars and even lead to people losing their homes or cars.
Addition Financial members often talk to us about predatory lending and they want to know:
“How can I spot and get out of a predatory loan?”
That’s a good question to ask and we love to hear it because it means our members want to learn how to protect themselves. With help from some financial experts, we’ve created this guide to help you identify a predatory loan and learn how to get out of a predatory loan if you’ve already signed on the dotted line.
The best time to identify a predatory loan is before you sign the paperwork. It becomes difficult to get out of a loan agreement after you have signed it, although there are some exceptions. Here are some of the red flags that indicate a predatory loan.
When was the last time a representative from a bank or credit union knocked on your door (or called or sent an email) trying to convince you to borrow money? We’re guessing that the answer is never because we don’t do that and neither do the other lenders we know.
An unsolicited loan offer is almost always a scam of some kind. It could be a loan flipping scam where the lender will continually offer to refinance your loan and you’ll pay thousands of dollars in closing costs and loan fees. It could be a loan packing situation where you’ll be charged hidden fees. Either way, it’s not a good idea to accept an unsolicited lending offer.
One of the most common red flags of predatory lending is an exorbitantly higher interest rate. To be clear, we’re not talking about a rate that’s a little higher than usual. Predatory lending rates often reach into the triple digits when you annualize them.
As an example, Florida limits the interest rates for payday loans to 10%. That might sound reasonable until you realize that the 10% interest is fully amortized after 14 days. When you multiply that out over a year, the interest rate is over 240% – clearly predatory.
If you’re someone who has a limited credit history or a low credit score, the temptation to go with a lender that doesn’t require a credit check is real – but it’s also a mistake.
Any reputable lender will require a credit check to loan you money. You can find lenders who will work with you even if you have a low credit score. Credit unions are a good example. The lack of a credit check is an indication that the loan is predatory.
Lenders want borrowers to choose them over their competitors but they don’t use high pressure sales tactics to convince them. If someone tries to strong-arm you into borrowing money, it’s time to look for a different lender.
High pressure tactics might include repeated phone calls or emails, refusal to listen to your objections and respect your boundaries or scare tactics. If you experience any of these things it’s a sign that the lender is up to no good.
Sometimes, payment buyers – meaning people who are mostly concerned about finding an affordable loan payment – can get taken in by the promise of a low monthly payment. Once they’ve signed the loan documents, they discover that there’s a large balloon payment due at the end of the loan term.
Balloon payments are predatory because they can be used to force people to refinance when the balloon payment comes due. As a reminder, lenders must disclose a balloon payment on the Closing Disclosure.
Lenders are legally required to disclose loan terms to you prior to closing. Unscrupulous lenders may change the terms at the last minute and then try to strong-arm borrowers into signing.
It’s for this reason that you should always read the sample contract your lender sends you and request one if they don’t offer. You should make note of the key terms and then question any changes. Be prepared to walk away if the answers aren’t satisfactory.
What happens if you already signed the loan documents and you recognize that the loan or its terms are predatory? Here are some tips to help you get out of a predatory loan.
The first step is to know your legal rights. The Truth in Lending Act offers consumer protection against predatory lending practices.
What is the Truth in Lending Act? It’s a federal law that protects consumers and gives them certain rights related to borrowing money. One such right is the right of rescission, which allows people to back out of a loan agreement within three business days of receiving complete paperwork. It does not apply to mortgage lending but it does apply to refinancing.
The Office of the Comptroller of the Currency (OCC) has the right to order financial institutions to change terms and refund money if they have failed to disclose rates and finance charges.
Federal laws aren’t the only protections available to you as a borrower. Many states, including Florida, have enacted laws to protect consumers. Dave Reischer is a Consumer Attorney and the CEO of LegalAdvice.com. He told us:
“Many Federal and state laws have 'Anti-Predatory Lending' provisions that require a 'tangible net benefit' to the borrower to prevent a lender from merely lending credit on predatory terms and that are not for a qualified and substantial reason.”
We already mentioned that Florida has a law limiting the interest rates that payday lenders can charge to 10%. That still allows for high annual rates, but at least Florida residents have recourse to report violations.
Documentation is essential if you need to prove that you have entered into a predatory loan agreement. Carter Seuthe is the CEO of Credit Summit. He told us:
“Document everything. Get everything in writing. Know your rights and read the paperwork fully!”
We suggest collecting copies of any sample loan agreement you were given along with your final loan documents, Closing Disclosure, and copies of any emails you received. The more documents you have, the easier it will be to prove your case.
Any time there’s a question of legal wrongdoing, the subject of lawyers comes up. While you might not want to hire a lawyer, it may be necessary. Jake Hill is the CEO of DebtHammer. He mentioned lawyers, telling us this:
“Speaking with a lawyer isn't a bad idea. It might land you deeper in debt, but even an hour-long consult could be worth tens of thousands of dollars if it gets you out of a bad loan.”
Some consumer lawyers will offer a free initial consultation, giving you the opportunity to ask questions and learn about your rights. Even if you need to pay for a consultation, it might be worth spending a little money to get yourself out of a predatory lending situation.
We should note that you’ll need a lawyer who specializes in consumer affairs. While lawyers study a little bit of everything in law school, you’ll get the best result if you work with someone who understands anti-predatory lending laws. You should also remember that the mere mention of a lawyer (and the threat of a lawsuit) might be enough to get a predatory lender to give you an out.
If none of the things we have listed above work to get you out of a predatory loan, the final recourse you have is to refinance as soon as possible. Refinancing isn’t ideal because you’ll need to pay another set of closing costs, but here are a few pointers to help you out:
Your best bet is to go to a reputable lender, ideally a credit union where you’ll have an ownership stake and can take advantage of competitive rates.
Learning how to spot and get out of a predatory loan is essential for anybody who needs to borrow money to buy a house or a car or to consolidate debt. Remember that you have rights and study the unfair lending practices we’ve listed here to help you spot predatory lending before you sign anything.
Are you looking for a financial institution that cares about you and your money? Addition Financial is a federally-insured credit union offering substantial member benefits and competitive rates. Click here to become a member now!