Predatory lending is a rampant problem in the United States. It’s also one of the most difficult to spot, especially if you’re not familiar with how these companies operate. Here are five signs that could indicate predatory lending:
1. The loan is designed to be short-term
One of the most obvious signs of predatory lending is that the loan is designed to be short-term. Short-term loans are designed to be paid off quickly, so they generally have high interest rates and fees. They also may have high penalties for late payments or prepayment penalties.
2. High interest, high fees
The interest rate and certain fees may be higher than you can find with other lenders. You might have heard the term “predatory lending” in the news or from friends, but you’re not sure what it means. Predatory lending is a term to describe a practice where people who use their homes as collateral for loans are charged higher rates than other borrowers and are subject to excessive fees by their lenders.
3. Mandatory arbitration clauses
If you’re not familiar with arbitration clauses, they are a form of forced arbitration. Essentially, they force consumers into private proceedings where they can’t sue the company or bring a class action lawsuit.
In many cases, arbitration clauses are hidden in the fine print and difficult to find on legal documents. Arbitration clauses are also often written to prevent consumers from getting their money back or receiving any other type of restitution if they’re wronged by a company.
These types of provisions put an undue burden on consumers by forcing them into private arbitrations that aren’t transparent and can be manipulated by companies who are more experienced at this than most individuals would be.
4. A bait-and-switch approach
An example of this would be that the loan is offered with a low initial interest rate, but then the rate will jump after a certain amount of time. If you cannot make your payments, it can rise even higher than what it was before. Predatory lenders also know how to create an illusion for consumers that they are getting one thing when it’s actually another. This is often termed bait-and-switch tactics and has led many people into more financial trouble than they were already in before applying for these loans.
5. No credit check and no income verification loan
A no credit check and no income verification loan is one of the most common signs of predatory lending. If you are thinking about this type of loan, there are some things you should know:
- With a no credit check and no income verification mortgage, you may be able to buy a home without having to prove that your finances are in order. This can lead to financial problems down the road if you can’t afford the monthly payments on your new home.
- A lot of negative information will still appear on your credit report even though it wasn’t considered when qualifying for an NCC/NIV mortgage. This could mean that when rates rise or if something unfortunate happens financially, it may be hard for homeowners with these loans to refinance their homes at better rates later on.
If you’re someone looking for a new home mortgage or loan, there are many great options available. However, it’s important to stay informed about predatory lending practices so that you can avoid being scammed. That’s why, as experts at SoFi point out, you have to “select from a variety of home loan options with mortgage rates and monthly payments that work for your budget.” Make sure you compare the interest rates of home mortgage loans offered by different lenders. Your home rate mortgage value can make a big difference in your financial life.