Don't get lost in the predatory lending money maze: Internet Scambusters #925
Predatory lending is a wicked way of exploiting peoples' financial difficulties.
And they come from all manner of sources, taking on different guises according to the opportunities that scammers spot.
In this week's issue, we'll outline the different types of lending scams and tell you what bankers say you ought to do to avoid them.
Let's get started...
Beat the Predatory Lending Crooks
Are you "house rich but cash poor"? If so, you're a prime target for predatory lending scammers.
"House rich" means you have a lot of value locked in your house. Maybe you paid off your mortgage. Or the market value of your house has risen way above what you paid for it and the current level of your mortgage.
But being "cash poor" means you're low on funds and maybe can't afford some of the things you want to do, like improving your home or, Covid permitting, taking an expensive vacation.
It's just a short, misguided step from this situation to borrowing money at excessive interest rates from scammers.
But you're not the only target, by any means. In the current economic climate, ordinary folk struggling to make loan payments or buy essentials, and small firms trying to keep their heads above water, can end up in the predatory loan trap.
The scam is simple. You're basically charged incredibly high interest rates, often after putting up your home or other property as a surety. You fall behind with payments, you lose your property, and your life is never the same again.
Or you find yourself paying for all types of crippling fees and extras you didn't know about when you took out the loan.
The tragedy is that at some stage you probably signed a document, making this whole terrible process legal! You may have been tricked into signing, of course, which is potentially illegal, but you're probably not going to be in a financial position to put up a legal fight.
The predatory lending honey traps are everywhere -- newspaper and TV ads inviting you to release equity from your home, mortgage brokers and even realtors claiming to have your interests at heart, home improvement contractors looking for work and a tidy commission from a lender, door-to-door sales people, and so on.
There are at least five common predatory lending tactics:
1. Equity Stripping
You get a loan regardless of your ability to pay. Then, if you don't pay, your home is foreclosed.
2. Bait-and-Switch Schemes
You're offered a low rate of interest but a higher rate that you didn't know about kicks in after a few months.
3. Balloon Loans
Similar to bait-and-switch, you start with a low payment loan, only to discover it's for a short period with a large settlement sum due at the end, which will then likely have to be refinanced at an astronomical rate.
4. Loan Flipping
You're forced to continuously refinance the loan because you can't make the payments. Each time you have to pay a whole raft of fees -- and the interest rate probably goes up too.
You're tricked into agreeing to additional fees and purchases in order to secure the loan. Typically, this might involve having to buy an expensive insurance policy.
Other tricks include: high processing fees, a penalty for paying off the loan, promises to fix any of your concerns with future refinances, and repeatedly coming back to you with new "equity release" refinance terms.
How to Avoid a Predatory Pending Scam
Sometimes, when you're under intense financial pressure, it's easy to grab at the first straw that a potential lender holds out to you. Don't. Take it slowly and steadily. Never feel rushed or pressured -- that's the fastest route to a big mistake.
For the rest, follow these tips from the American Bankers Association (ABA):
- Watch out for harassing phone calls or solicitations from lenders offering easy, next-day approval or "guaranteed" low payments -- as long as you commit right now.
- Always shop around for the best deal and compare the bottom line for each one -- total costs.
- Beware of high, upfront fees and percentage points. They can turn a loan with low monthly payments into one that actually costs you more in the long run, says the ABA.
- Beware too of telemarketers and TV ads offering loans or rates that seem too good to be true. They are.
- Always read all the fine print both on initial documentation and any forms you're required to sign.
- Avoid lenders who say that a bad credit record is not a problem. Trustworthy lenders don't operate this way, according to the ABA.
- When you've found a lender you're interested in dealing with, check them out. Get references.
"Before borrowing, you should know exactly what you're getting and what you're paying. Never be afraid to ask the lender to explain any fees, terms, or conditions you don't understand. And never sign a blank form," the Association warns.
"Make sure what you sign is what you agreed to verbally. Don't sign any contract that does not agree with what the salesperson presented."
You should also watch out for lenders who tell you not to worry if you find you can't pay your mortgage, saying they'll help you refinance your loan if you need to. You bet they will.
Predatory lenders make money from the high fees and closing costs they'll charge you to refinance the loan that they knew you couldn't afford to repay in the first place, says the bankers organization.
Alert of the Week
It's not the first time, but scammers are once again posing as officials of the very organization that tries to keep tabs on them -- the Federal Trade Commission (FTC).
They're contacting consumers by phone, email, and social media promoting what they call The Global Empowerment Fund, which apparently has lots of money to give away. Of course, it doesn't.
And also, of course, in order to deposit those supposed funds into your bank, they'll need your account details. But give them that info and, instead of putting money in, they'll be taking money out!
The FTC never asks for people's account details. When it does hand out money -- usually returning the proceeds of other scams -- it sends out checks.
That's it for today -- we hope you enjoy your week!