Predatory Lending - Consumer Loans
Predatory Lending

Loans to Avoid

In terms of predatory lending practices, most of the worst offenders in the marketplace are in the area of non-consumer loans.  Watch out for the loans and loan practices outlined below.

Packing

Packing occurs when products which you, the borrower, were not seeking out are packaged into a loan you did intend to apply for and then financed right along with the loan you originally sought out.   Examples of items which are “packed” into loans include credit life insurance and other types of insurance related products you don't want or need.  Protect yourself by reviewing all loans documents carefully to insure that something you did not specifically request is not “packed” into or on top of your base loan amount.  And if you do not understand the origin of a line item included in your loan documents, you must ask what it is.  Many borrowers are not aware that even the smallest of fees included in short-term borrowing can translate into three and four digit APR's (annual percentage rate) very quickly.




Payday Loans

Payday loans are a rapidly growing area of the financial services market.  These loans are also referred to as delayed deposit check loans, post-dated check loans, check advance loans or cash advance loans.  The way they typically begin is with a borrower writing a personal check, payable to the lender in question, for the amount they need to borrowe in addition to a loan fee.  The fee may be a straight percentage of the check amount or a flat incremental fee per $100 dollars borrowed.  These loans must normally be repaid within 40 days and the interest rate on this loan could run as high as or even exceed 500%!  These supposedly short term cash advance loans are meant to take you to the cleaners and are a loan of desperation or of last resort.  They will likely make your already bad situation even worse.

Auto Title Loans

Not unlike payday loans the auto title loan is a short-term loan used by borrowers for small cash emergencies. The term of the loan is typically not more than 30 days and a borrower's vehicle is used to secure the loan.  A typical auto title loan will have a triple digit annual rate however the loan will usually reflect a rate of about 25% for one month which would then translate into 300% on an annualized basis.   At the end of the 30 day period, the lender will accept the interest payment due and then allow the debt to be rolled over for another month.  The lender may be allowed to roll over (or flip) the loan up to six times!  In cases where a borrower is unable to pay off the loan in full, interest will begin to accumulate at a very high rate.  Keep in mind that if the loan is not repaid, the lender will repossess your vehicle and sell it.  In many cases the value of the vehicle far exceeds that of the loan.  This loan provides only a brief short term cash solution to the problem and the eventual outcome could be potentially disastrous should you find yourself in a position where you cannot repay the loan on time and end up paying a skyrocketing rate of interest or worse yet, you lose your car.


Debt Consolidation Loans

A debt consolidation loan is issued to a borrower who's already in over their head in debt.  Their credit card balances have escalated beyond the maximum they can afford and even the minimum monthly payments are consuming almost all their monthly income.  There is no clear way these revolving loans could be paid off in the foreseeable future and drastic measures are required.  Is a debt consolidation loan the answer?   Well it depends.  In almost every case a debt consolidation loan is structured as a second mortgage on a borrower's primary residence.  Therefore a debt consolidation loan can mean virtually betting one's house that they can pay off their revolving credit card debt.  Even in cases involving a bankruptcy filing, the creditor will have the right to take the collateral for the loan, namely a borrower's home, if the loan payments are not made.   In most cases the overall payment for debt servicing will go down because the interest rate will drop as the loan is now secured against one's primary residence, but in some cases the payment could be reduced entirely due to the term of the loan being stretched out significantly, possibly for up to 30 years. For a borrower who is already in a financial jam due to of a lack of discipline applied to their credit card purchases, this could be a dangerous turn in the road.  If the same dysfunctional spending habits continue, it is a borrower's home that will now be on the line.    

 

More Problems for Banks Seen Looming on the Horizon


Nancy Osborne, ERATE.com Nancy Osborne has had experience in the mortgage business for over 20 years and is a founder of both ERATE, where she is currently the COO and Progressive Capital Funding, where she served as President. She has held real estate licenses in several states and has received both the national Certified Mortgage Consultant and Certified Residential Mortgage Specialist designations. Ms. Osborne is also a primary contributing writer and content developer for ERATE.

"I am addicted to Bloomberg TV" says Nancy.

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