Avoiding Predatory Lending Scams

Okay, folks, here is the tried-and-true, shopworn cliché every article of this nature invariably contains: When something sounds too good to be true - it usually is.

If you're only going to take one piece of advice for avoiding predatory lending scams from this article, that's the one you want to fold up and put away for a rainy day. 

So, What Is Predatory Lending?

The U.S. General Accounting Office describes it thusly: "A range of practices, including deception, fraud or manipulation a mortgage broker or lender may use to make a loan with terms disadvantageous to the borrower."

This includes charging excessive fees and interest rates without regard to borrowers' ability to repay, refinancing borrowers' loans repeatedly over a short period of time without any economic gain for the borrower and committing outright fraud or deception such as falsifying documents or intentionally misinforming borrowers about the terms of a loan.

A Few Typical Scams Include:

Bait and Switch: These loans are often offered with exceptionally low interest rates that usually turn out to be good for a short "introductory period." Those rates then escalate to figures almost guaranteed to result in foreclosures or a need to refinance when that period passes.

A variation of this ruse is touting a monthly interest rate without making it plainly evident the number quoted is, in fact, monthly. This is particularly insidious when you consider a monthly rate of three percent can work out to be 36 percent or greater annually. The borrower thinks they're getting a loan at three percent, when the reality is much, much higher. 

Balloon Payments: These loans trumpet a super low interest rate while only peripherally mentioning the entire balance will come due at some point. In other words, they draw people in with an exceptionally affordable "interest only" payment. 

The borrower happily signs, only to see the entire principal come due all at once at some point in the future. When they can't afford to pay it, they'll either take on a new loan - along with all of the fees that action entails- or they'll forfeit all of the interest payments they've made, as well as the property. 

Asset Based Lending: In this ruse, a lender looks at your income and realizes it isn't enough to support the loan you're requesting. However, they say that's not a problem, because the value of property you're offering as collateral is more than sufficient. Along these same lines, some unscrupulous lenders will even encourage you to lie about your income on the application. 

However, none of this changes the fact that you won't be able to afford the payments you'll need to make to keep the loan in good standing. Eventually, you'll run out of cash and the lender will take your property, along with all of the cash you put up to get to that point. 

How to Protect Yourself

Education will always be your best insulation against scams. 

Read every single word of every document before you sign loan papers. If you don't understand something that you're being asked to sign, find someone you trust to help you do so. 

Research the reputation of the lender just as you should with any other business with which you're thinking to engage. As an example, these Freedom Debt Relief reviews will give you a good idea of what people think about that settlement program if you're looking for help with your  financial obligations. 

Before agreeing to accept a loan, consult the Office of the Attorney General in your state and sites like Angie's List and Yelp to see what sort of reputation your prospective lender has carved out.

Above all though, listen to your gut. No matter how much you want to believe what you're being told, if it sounds too good to be true, it probably is. Trusting your instincts will carry you a long way toward avoiding predatory lending scams.