Predatory lending is certainly much less common today than it was just 10 years ago. That doesn’t mean that they don’t exist, though. Understanding what they are and what to look for can help you avoid taking on a loan that might not be what you think.
Typically, lenders target borrowers that don’t qualify for standard loans, such as conventional or government-backed loans, to get them to take the predatory loan. While they aren’t always bad, you should know what to look for in them.
Predatory lending is often signified by large fees. Today, you shouldn’t pay more than 3 points on a loan. If you come across a lender charging more than 3 points, it’s probably predatory lending. Charging anything more than 3 points is excessive and unnecessary – this includes any points to buy down your interest rate.
Higher Interest Rates
No two lenders will charge the same interest rate for your loan, but there shouldn’t be a vast difference. That’s why it’s important to secure at least three quotes for your loan. This way you can spot any predatory lenders right off the bat. There’s no reason to pay those inflated interest rates if you qualify for a lower rate from other lenders.
Only Quoting Your Principal and Interest Payment
Your mortgage payment should always include the principal, interest, real estate taxes, and homeowner’s insurance, as they are the true cost of owning a home. If a lender only tells you what your principal and interest will be, but avoids including the taxes and insurance, you may take a loan that you can’t afford. Make sure that you ask if this is the full payment or if you need to add in the taxes and insurance.
Make sure you ask if you can pay your loan off at any time without penalty. If there is a penalty, you could owe as much as six months’ worth of interest if you pay the loan off within 3 to 5 years. Prepayment penalties aren’t allowed on standard loans any longer, so if you come across one with a prepayment penalty, it’s likely a predatory loan.
Steering You Into a Subprime Loan
You might hear this called ‘steering and targeting.’ Lenders take advantage of borrowers in certain situations, steering them to subprime loans even if they don’t necessarily need it. They convince borrowers that they wouldn’t qualify for any other program and get them to take the higher interest rates and fees associated with predatory loans. This gives the same lenders a chance to get you to refinance in the future into a ‘better loan,’ all while the lender makes more money off you.
Today predatory lending isn’t as common, but it is still out there. There are numerous other options that you can likely choose from, so make sure that you do your homework. Shop around with different lenders to find the one that will meet your needs and not expose you to the world of predatory lending.