Predatory lending tactics are something commonly associated with unscrupulous loan sharks, but are also present in more reputable industries. It involves either preying on those desperate for a loan, or others they can con into taking a loan they cannot pay back. If you accept a loan secured against your house, to start a business for example, predatory lending practices can lead to financial ruin if one is not careful.
Usually, the loans repayments are too high to reasonably repay, meaning that the bank, for example, is only interest in seizing the property secured against the debt for re-sale. At the first sign of trouble, as the lenders are only interested in turning a profit and seek to acquire your assets as quickly as possible.
There are numerous signals that you must be aware of to avoid predatory lending strategies. Often, excessive lending fees are the first sign, which is why it is wise to research average fees in your area beforehand, to know whether you are being overcharged. This can be combined with early payment penalties, encouraging you to owe money for longer, paying more interest, to avoid the prohibitive penalty fee.
Look out for interest rates that only go up, not down. This may be counterbalanced by the offer of refinancing later, but from a predatory lender, this is not necessarily a long-term solution. And if the lender offers repeated refinancing, also known as flipping, this can be a red flag. Refinancing is usually perfectly legitimate, indeed, a useful service, but repeated flips will cost you a lot of money in fees over the long term. The promise of future refinancing is often used to compensate for loans that stretch you too far, so be aware.
Also be on the lookout for advertisements that offer loans despite poor credit ratings and history. This is a classic hallmark of a predatory lender and should be avoided. Another aggressive tactic involves unsolicited house calls, it is important to be vigilant when design with any lender who operates like this. Pressure is a key strategy for predatory lenders, so if you are told that a deal is only good if signed immediately, or put under huge pressure to agree to something you aren’t sure about, then that could be a sign that the lender is engaging in predatory lending practices.