By Barbara O’Neill, Ph.D., CFP®
July 15 is Military Consumer Protection Day so July is a good time to explore frauds that affect service members and their families. The Personal Finance team will present a webinar on Predatory Lending Practices & How to Avoid Them on Tuesday, July 28 at 11 a.m. ET.
Most lenders are reputable and community-minded and charge a fair price for the use of borrowed money. Unfortunately, there is also a relatively small subset of lenders, called predatory lenders, who take advantage of others. Predatory lenders do just what the name implies. They market to vulnerable populations, such as the elderly, minorities, and people with poor credit histories, and charge excessively high interest and up-front fees.
There is no precise definition of predatory lending. Rather, it consists of a number of practices that exploit consumers and can result in the loss of homes and life savings. A common element of all predatory loans is exploiting a consumer’s ability to repay. Borrowers are often lent amounts far in excess of what their incomes can support. In the case of mortgages, lenders are assured of a profit- either through loan payments or foreclosure (seizing a borrower’s home). Interest rates and fees are also well above average market costs.
How can military families avoid predatory loans? By being cautious and skeptical. Consider the following tips:
- Always check out a lender before signing any loan documents, particularly if they contacted you first and they are not located in the city or county where you live. Start with the Better Business Bureau (BBB). To get the name of the BBB closest to you, visit bbb.org. Local or state consumer protection (consumer affairs) agencies can also provide information about whether a lender has had complaints from consumers.
- Be especially wary of calls and visits about “bargain” loans that are “available only for a very short time.” Read loan documents carefully before signing and always get a copy for your records.
- Walk away from any lender that encourages you to borrow more than you need (and can afford), requires credit life insurance, provides a blank contract with spaces “to be filled in later,” charges excessively high costs (e.g., closing costs as much as $5,000 on a $25,000 loan) and doesn’t answer all your questions.
- Never sign a loan contract you don’t understand and always check that terms that were told to you orally (e.g., interest rate and fees) are the same in the loan contract. Also be wary of lenders who swamp borrowers with a lot of papers to discourage reading everything closely.
- Never sign loan documents because you feel pressured to do so. Also, be very suspicious of lenders that you did not contact first. Most reputable mortgage or credit lenders do not solicit business over the phone, via e-mail, or door-to-door.
Visit MilitaryConsumer.gov for free resources, tip sheets, and blog posts from national consumer protection experts. Below is a 5-minute video that demonstrates a predatory loan application in progress with a slick lender.
To join the July 28 webinar, Predatory Lending Practices & How to Avoid Them visit the event page.
This post was published on the OneOp blog on July 7, 2015.