WHAT ARE PREDATORY LENDERS?
They target homeowners, especially those that are elderly, or have low income or credit problems. These lenders pressure homeowners into taking out home equity loans that they can't afford to pay back.
WATCH OUT FOR HIGH-COST HOME LOANS
The term “High-Cost Home Loan” is often a red flag. This type of loan is secured by the value of your home. The annual percentage rate is usually 8 to 9 points higher than a regular first or second mortgage.
Home loans with percentage points or fees greater than 5 percent are also considered High-Cost Home Loans. These types of loans have several restrictions, including:
- lenders must give you details about the loan terms
- lenders can’t require points or fees greater than 5 percent
- lenders can’t charge you percentage points and fees for refinancing within two years of your current loan, and
- these loans are illegal unless the lender is certain you can make your payments.
AVOIDING PREDATORY LENDERS
There are some common warning signs with predatory lenders:
- a salesperson who calls you or comes to your door offering a loan.
- ads that say things like "bargain loans," or “No credit? No problem!,” and
- sales tricks, like saying “this offer is only good for a short time.”
WHEN SHOPPING FOR A LOAN
Never sign a blank document and don't sign something if you don't understand it. Make sure to ask questions about:
- the monthly payment
- the annual percentage rate
- the total cost of the loan, and
- the length of the loan.
NEVER agree to a loan if your income isn't enough to make the monthly payment. The lowest monthly payment is also not always the best deal.
Be on the lookout for hidden fees, like insurance and broker fees, and fees for creating the loan, which should be 2 percent or less. Many predatory lenders will charge 10 percent or more.
WATCH OUT FOR BALLOON LOANS
This type of loan means you will owe one large payment when the loan is over. The monthly payments will seem small because you're only paying the interest. When the loan ends, you'll have to pay the entire principal.
If you agree to a loan, keep detailed records. You have three days to cancel the loan if you change your mind.