How to Identify Predatory Lending Practices

The signs of predatory lending practices are there for you to find. Many borrowers feel taken advantage of if they do sign a predatory loan; these borrowers may have missed common indications the loan was a bad idea early on in the process. If you note any of these signs, reconsider your contract before taking the financing.

Up-Front Fees

Any lender that charges an up-front fee prior to even speaking with you about a loan may be a predatory lender. For example, some lenders calling themselves credit unions ask for a membership fee up front. They advertise this fee as the cost to join a network of borrowers to reduce your cost to finance. In reality, this fee simply goes into the lender's pocket. 

Undisclosed Fees

A lender is required by law to disclose all fees up front in order to comply with the Truth in Lending Act. If your lender hints there may be financing fees in the future, and these fees are not disclosed, you should walk away from the loan. This is true even if the lender does not tell you there will be a fee for the credit check and then asks you to pay after the credit check has been run. This is technically an undisclosed fee, and it is a sign that you may have located a predatory lender.

Subprime Interest Rates

Subprime loans are not necessarily a sign of predatory lending. However, interest rates are set at a national level, and a lender who issues a loan below these rates is going against the national averages. The only way the lender will profit on a subprime loan is to raise the rate in the future. If you are taking this type of loan, you must be sure to cap how high the rate can climb. Otherwise, the lender essentially gets away with fee nondisclosure because the variable rate loan is not set from the beginning.

Jumbo Loans

Jumbo loans also go against national averages and recommendations. The government sets loan limits for a reason; that reason is to prevent lenders from convincing individuals to take huge loans they cannot afford to pay off. Of course, some borrowers take and successfully repay jumbo loans because their income is high enough to allow for this. Before you take a jumbo loan, however, you must think about the true affordability of the loan and the integrity of your lender in extending such a large amount of financing your way.

Fast Processing

Any lender that advertises same-day financing should be double checked. Of course, plenty of car lenders and traditional banks do extend loans within a short period of time. However, these traditional lenders do so only if they are dealing with high-credit, stable-income borrowers. The lenders who issue loans immediately to borrowers with poor financial profiles may be looking to profit on default. A good example is a payday or cash advance lender. These companies know there is a low chance the borrower will repay, but the high finance fees are often worth the risk.


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