Debt Reduction Advice | Debt Reduction Advice

Predatory lending is a term used all the time, but do you know how to identify when it exists? There are many consumers who are lured into loan agreements without realizing they are victims of predatory lending practices. Predatory lending is considered to be unethical and even abusive, yet it continues. Like identify theft, the way to prevent becoming a victim is by learning how to recognize the rules of engagement.

Naturally the first rule is to be on the alert for predatory lending tactics after you learn the most common ones. You can even develop a checklist you can do down each time you plan on borrowing money. If you find the loan terms fit any of the items on the predatory lending list then you know there is a potential problem.

High on the list of predatory lending signs are excessive fees. For example, when you take out a mortgage you hope to only pay approximately one percent or one discount point on a loan. There may be other fees too. If you start loan negotiations with high discount points already assumed then you are probably dealing with a predatory lender.

Another sign of predatory lending is in the works is when a lender tries to convince you to take out a more expensive loan even if you can qualify for the less expensive traditional loan. According to Fannie Mae, approximately half of the people who currently have subprime mortgages with higher rate could have taken out a mortgage with less expensive rates.

Predatory lenders will try to make an expensive loan look as inexpensive as possible. For example, the cost of the taxes and insurance may not be quoted in the monthly payment amount so you think you are agreeing to an affordable loan. Promises of frequent refinancing as needed are another indication of a predatory lender. Though refinancing is often seen as a way to reduce a mortgage payment, the fact is each refinancing costs money and can actually add to your mortgage balance.

Many of the people who are facing foreclosure during the recession were victims of predatory lending. There were millions of subprime mortgage written before the collapse of the economy that had adjustable interest rates or ARMs. The mortgage was written with a low interest rate that would only last a few years. The rate would then suddenly rise forcing the mortgage payment to balloon.

Adjustable rate mortgages are not always predatory. One of the keys is whether the interest rate can go down as well as up. If it is tied to a primate rate, for example, then interest can go down when the prime interest rate goes down.

The sad fact is that predatory lending was rampant until the securities market collapsed over a year ago. Now the government is taking a much closer look at predatory lending practices and assessing how so many Americans ended up with unaffordable mortgages even after paying on houses for decades. But Americans will also have to understand that the new order of business in the lending industry will make it much more difficult to obtain credit.