8 Types of Predatory Lending Tactics Employees Should Know About
Predatory lending practices are becoming more and more prevalent throughout the U.S. This type of lending takes advantage of the borrower and benefits only the lender. Unfortunately, the practice of predatory lending is not always illegal. Still, it can leave borrowers with a ruined credit record, an unmanageable debt burden and is a leading cause of homelessness.
Predatory lenders tend to target certain groups of people. These include:
They also prey on people who are having a financial emergency and would struggle to repay. Unexpected medical events, car or home repairs, and even legal fines and fees are often unplanned for and occur in at-risk families more-so than more affluent families. Payday lenders also target low-income families, people who have recently lost their job or who have a weak credit rating, and individuals who are unable to borrow anywhere else. Predatory lending can put on many faces, such as:
- Payday loans
- Tax refund loans
- Car loans
Types of Predatory Lending to Watch Out For
If your employees want to take out a loan, it’s important that they’re aware of some unfair and abusive lending practices. In order to prevent your staff from falling into a loan trap, they need to understand the most common predatory lending practices:
- Equity stripping: Also known as equity skimming, this practice is usually targeted at homeowners facing foreclosure. The lender buys the borrower’s property and agrees that the borrower can rent the home and live there as a tenant. The purpose is to reduce the value of the real estate and make it unattractive to creditors. The lender also hopes that the borrower will default on the rent payment.
- Loan flipping: The lender refinances a loan for a high fee. The borrower is often encouraged to increase the amount of the existing loan. This form of lending only extends the duration of the loan and has no benefit whatsoever for the borrower.
- Insurance packing: In this type of predatory lending scheme, the lender adds an insurance clause to the borrower’s home mortgage note. This is often set up so that the borrower isn’t aware of the exact terms of the clause until he or she starts to notice the financial effects. Like other forms of predatory lending, insurance packing only benefits the lender.
- Bait and switch: This type of loan involves a special offer or attractive terms to entice the borrower. But the lender has the borrower sign a loan agreement with a different set of terms, ones which the borrower would probably not have agreed to at the outset.
- Prepayment penalties: These fees are incurred when the lender tries to pay off the loan early or to refinance the loan. Prepayment fees can be exorbitant.
- Mortgage servicing abuses: The lender arranges a loan based on equity but charges irregular or illegal fees such as late fees and fails to provide accurate statements of repayment. This means that the borrower cannot determine how much they have repaid and how much is owed. The borrower is left in danger of paying back more than is owed.
- The “home improvement” loan: The borrower wishing to get repairs done on their home is pressured by the contractor to sign for a loan. If the borrower questions the terms of the agreement, the contractor threatens to stop work, leaving the borrower little choice but to sign. This leaves the borrower with an equity loan with high-interest rates and fees. Then the contractor may not complete the work to the borrower’s satisfaction, which only adds to the problem.
- Hidden balloon payment: This is a high fee that is due at the end of the loan. It is not disclosed to the borrower before they sign the contract. The borrower is encouraged to take this loan because of the lower upfront payments but then struggles to make payments later in the term of the loan.
How to Avoid Predatory Lending
Knowing the right questions to ask is key for your employees when they want to take out a loan of any type. Here are some tips to help them stay ahead of the game.
- Stay in your comfort zone: Your employees should never feel threatened by a lender or pressured to sign a contract when they would rather not. They should feel confident in making the right decisions and entering into an agreement that will help their financial situation, not worsen it.
- Get several quotes: Another way for workers to avoid predatory lending is to shop around when looking for a loan. This will give them an opportunity to find the best deal and feel comfortable with their decision.
- Borrow what you need: Many predatory lenders will try to talk borrowers into signing for a loan that is larger than they need. The whole point of this is to get the borrower to default on the loan.
- Look out for unconcerned lenders: Lenders who show a lack of concern about a potential borrower’s financial situation are probably predatory. They should be concerned about the borrower’s ability to make the loan repayments. If a lender is not concerned about your employee’s finances, then they’re probably more interested in having them default.
- Identify red flags: Before signing a loan agreement, your employees should always be able to fully understand the terms of the loan. If they do not, they should ask for an explanation. If the lender refuses to define the terms clearly or gives an equally confusing response, this is usually an indication of a predatory lender, and the borrower should not sign.
- Avoid loans you can’t pay back: Predatory lenders often try to structure loan repayments so that they are virtually impossible to pay back. One common tactic is by only charging the borrower the interest rate, which means they are never paying down the principal. Borrowers should always check out the repayment schedule to make sure they can pay back the loan on time.
- Always read the fine print: Your employees should be encouraged to take their time when applying for a loan and to read through the details carefully. They should specifically look for unnecessary charges and prepayment penalties.
Great places to work usually incorporate education about predatory lenders as part of their workplace financial wellness program. If any of your employees have already become a victim to predatory lenders, they can report the lender to their state’s consumer protection office. Employees who have been taken advantage of should also talk to an attorney for legal advice, especially if they have fallen behind with their loan repayments.