It’s important to state the obvious here: you cannot have a predatory lender without a predatory loan. It is the elephant in the room, yet one reason many people get trapped into predatory loans is because they focus too much on the lender – their convincing tone of voice, their smile, and their credentials. Yet when all is said and done it is what you sign that will seal your fate. The proof is on the paper, so pay attention to what you are signing.
But what exactly is a predatory loan? Think of those payday loans that are often advertised to get people from one payday to the next due to some unforeseen event or emergency. They are known by two major factors: the insanely high interest rates and the short amount of time allowed to repay the loan in full. The combination of these two things make it very difficult for people to meet the terms, and so the interest piles up and they are caught in a repayment cycle that seems to have no end.
So predatory loans have more ways to trap you because they tend to be more complicated and have more details to cover. Yet the basic principle is still the same: to have you sign a contract that will make monthly payments difficult if not impossible to meet. But in the case of real estate you stand to lose your property – a significant difference when compared to a payday loan.
One of the first warning signs you are being led into a predatory loan scheme is when the lender does not perform a credit check on you (or tells you not to worry about it). When it comes to any loan your credit score of FICO is always a major factor, both for determining your creditworthiness and determining the amount of interest you will have to pay on the loan.
A second thing to watch for is the amount of money the lender is willing to offer. You should have a good idea how much you can reasonably afford for the period of time the loan covers. This is something that you should not open for discussion because it is likely the predatory lender will have a ready-made reason why their insanely high offer is manageable for you. You have the choice of either cutting the meeting short or letting them finish and then show them the door.
A common strategy is to keep you isolated from other financial institutions that will compete with them or contradict some of the advice you have been given. If you only know what one person has told you, then you will have no way of knowing for sure if there is anything else out there that is a better situation for you. The simplest way to avoid this is to meet with several financial institutions or lenders and compare notes. However, do this independently and don’t let any lender you plan to do this. You might end up getting a referral to other predatory lending companies.
The next thing to keep an eye out for is actually the preparation step to what follows. You should be asking questions during the meeting. There should be at least two lists of questions – one that is prepared beforehand and the second which is created during the meeting. One other person should be attending the meeting with you to jot down questions while you are concentrating on the presentation (and jotting down some questions yourself). Any question that is not given a clear and complete answer should be red flagged. It might not be intended to deceive you but only a miscommunication, so that does not make it a reason to slam the door on the offer.
The step that follows is to end the meeting and take your notes home with you to compare and review with the other offers. There is no need to rush. In fact, one of the tactics used by predatory lenders has been used for decades to get people to buy cars, homes, and even timeshares – high pressure. A reputable lender will give you all the time you need to review and discuss the offer in private without any interference from them. The obvious question for you to ask is: what’s the rush? If you are rushed to get the loan then you are only setting yourself up for the predatory loan tactic. If not, then why would a lender want to put any pressure on you to make a decision right away? Think of the questions you ask and get the answers to as a way to slow things down.
Finally, if it doesn’t feel right to you, don’t sign anything. You might be asked to sign something during the meeting or after the presentation is finished that might be presented as a “requirement” to continue the process. The process is under your control, and until you are clear you want to proceed with a particular lender, there is no reason to sign anything. As a rule of thumb, once you sign something you give up part of control of the process. You can change your mind later, and if it is a reputable lender they will be glad to move forward when it is right for you.