Without a certain amount of knowledge and a little healthy skepticism, many folks can fall into loan traps laid by unscrupulous, predatory lenders. These lenders count on your need for fast cash to tide you over temporarily, manipulate you using fear tactics, or take advantage of your lack of knowledge or just plain trust.
So what is predatory lending exactly? Sadly, it is exactly what is sounds like: Predatory lending is practiced by loan organizations that have taken advantage of the deregulation of the finance industry that has occurred over the last 20 years by offering financial services consumers would not otherwise be able to obtain. Often they operate at the fringes of legally acceptable behavior using deceptive loan offerings and terms.
Those most likely to be caught up include the young who may have limited financial history, minorities, the elderly, and the working poor who are just living from one paycheck to the next. The common thread among these groups is that they either don´t have credit at all or have had credit problems in the past. Their means are typically pretty modest and the best they are able to do is pay subprime interest rates because their credit risk is statistically higher. As a result their options for obtaining small, short term loans are pretty lean.
Creative "loan" programs include deferred loan deposits, title loans, or cash leasing. All of these loan types have extremely high interest rates.
The deferred loan deposit—commonly referred to as a payday loan—involves borrowing money by paying up front with a check to cover the loan amount and the loan fee. It doesn´t seem like that much when you borrow $100 for 14 days and then pay an $18.62 fee. When you figure the cost at an annual percentage rate though the rate is a whopping 484%. It´s estimated that more than 30% of the quick cash businesses charge 500% interest when calculated at an annual percentage rate. Most companies allow borrowers to rollover the loan, which then adds additional charges. The result for many borrowers becomes a vicious circle. Companies in this business routinely circumvent usury laws by charging "fees", not interest.
Title loans entail signing a vehicle´s title over to the lender, in effect pawning the car. If the borrower fails to pay back the loan and interest, the lender may repossess the vehicle. The lender may charge additional repossession and storage fees before the borrower can reclaim the car. And, once repossessed, the lender may sell the car.
Cash leasing occurs when state laws have usury limits. These "leases" are made by companies that have partnerships with banks or by using devices to camouflage loan transactions. For example, a borrower may sell a refrigerator to the lender, then lease it back. Also skating the edge of legal transactions is the claim that the borrower is leasing cash, not borrowing it; therefore the lender isn´t subject to the usury laws.
Many people are caught up in this borrowing-rollover cycle because of immediate need, limited resources, and few options. For those lucky enough to have choices, the following tips are just common sense:
Pay less every month in interest on your mortgage. Check at Diamond Peak Mortgage to find out if you qualify for a lower rate.