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Watch out for predatory credit

by Shirley Anderson-Porisch

February 18, 2009

Within our struggling economy, many consumers look for alternatives to managing their personal finances. Having been turned away by prime lenders, consumers in a financial crisis often turn to other options that usually fit the category of predatory lending.

There is no definition for predatory lending but there are laws against many of their common practices, including deceptive and abusive loan terms. Predatory loans are usually secured by collateral, i.e. a house, car or item with cash value, so that if the borrower defaults, the lender can repossess or foreclose.

One common predatory practice is offering a short-term loan with disproportional high fees and often hidden fees. These lenders will dispute that fees are really interest charges, but don't be fooled. Examples include payday loans, credit card late fees, overdraft fees and Tax Refund Anticipation Loans.

Predatory lenders are also characterized by offering small monthly payments with a large balloon payment at the end of the loan period. Sometimes these lenders will stretch out payments so that a large unaffordable payment is left at the end of the term.

A lender that penalizes consumers by increasing fees for prepaying the balance of a loan are also described as predatory. Consumers are forced to stay in high interest rate loans because they cannot afford to pay the prepayment penalty. Under many state laws, the terms of the prepayment penalty must be fully disclosed to the borrower at the time of the loan application and an alternative loan without pre-payment penalty must be available.

When a lender fails to disclose clear and accurate terms and conditions of a loan, then it is likely predatory. Most loans are complex transactions that include multiple pages of documents. The amount of paper can be overwhelming to most consumers and an overwhelmed consumer is easy prey for a predatory lender to disclose limited information or in agreements that change without notice.

To protect yourself, get the facts. Consumers who find themselves in a fraudulent situation probably did not get the information they needed before "signing their name on the dotted line."

Never be afraid to ask questions of any lender--especially regarding information that you just do not understand. Pay special attention to how payments will be made over time and find out if there's a balloon payment. Balloon payments can put consumers into unexpected financially harmful situations.

Finally, be cautious of lenders who suggest you borrow more than the value of what is being financed--the best example is a home. A high loan-to-value ratio puts both the home and the consumer's financial record at great risk.

My best advice for any loan, work with prime lenders where you may also have accounts for checking, saving, retirement, risk protection, etc. It will be strategy that can insure your long-term financial security.

Shirley Anderson-Porisch works as a family resource management Extension educator at the University of Minnesota and is an expert in family finance. She has long been a media contributor and is an accredited financial counselor.

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