Predatory lending refers to lenders who operate with questionable practices to take advantage of gullible unsuspecting borrowers.
While any form of sales tactics meant to trick borrowers into signing up for loans which they would otherwise not sign up with, the financial catastrophe of 2008 resulted with the term predatory lending being mainly associated with sub-prime mortgage lenders.
During the period of time leading up to 2008, misinformed and unsophisticated borrowers took on loans which they cannot afford to purchase houses by the masses.
As they started to default one after another, the ripple effect brought down the house of cards.
Two tactics in particular were disturbingly widespread.
- Equity grabbing
- Price gouging
It must be noted however, that even they were alarming, capitalism makes them legal.
Equity grabbing describes the practice of lending to borrowers with such terms that the goal of the lender was for the borrower to default.
This is so that the lender can acquire possession of the home’s equity.
The more disturbing part is that the nature of such transactions makes it legit. Making very difficult to regulate with law.
For example a method used to equity grab is to overcharge homeowners with home improvement works. The hepped-up contracting fee are then added to the mortgage on high interest rates. When an unsophisticated home buyer defaults, the house is foreclosed.
It takes a willing buyer to purchase high priced goods and services. That’s why prosecuting such business acts are next to impossible.
If a company can be found guilty for premium pricing in court punishable by law, then Apple would have already been taken to the cleaners for their highly priced iPhones.
And as everybody knows, that is never going to happen.
It has long been advocated that when one needs to generate cash, tapping on the individual’s home equity would be one of the smartest steps to take.
With a desperate borrower focused on cash in the bank rather than interest rates, one can be easily tempted to borrower against his home equity at monstrous rates as long as cash is generated.
After signing up for such loans, the borrower inevitably defaults and loses the home..
Even today in this modern digital age, a worrying high number of people don’t even conduct basic research on home loan rates available in the market.
This is because numbers and financial terms tend to give a lot of people headaches.
So they leave it to the lenders based on good faith that they will not be fleeced. This is especially so when a banker is referred to by a friend who has no knowledge of what he is sending you towards.
Yet the same borrowers go to supermarkets comparing the price of toothpaste and toilet paper, shunning those that cost a penny more.
The problem with this is that in the financial industry, putting your guard down is a recipe for victimization.
Price gouging plays into this weakness of borrowers who don’t check.
Expensive loans are sold to unsuspecting borrowers when another lender next door could have interest rates that are half of that.
For example teaser loans can look and taste like candy to borrowers who are not in the know. They merrily sign up for them only to find out 3 year later that they are in fact adjustable rate mortgages with no adjustment cap.
That is not so bad if the mortgage rates are pegged to an index.
But if the loan is set against an internal board rate which is solely up to the lender to determine, kiss goodbye to your house if it’s a predator lender.
Protection from predators
While it can seem like a jungle out there and there’s little you can do to protect yourself from hyenas unless you are an elephant or rhinoceros of sorts, the steps you can take to avoid becoming a victim of predatory lenders are basically very simple.
The solution is: Be Informed
For example, telling a mortgage broker that you know of an alternative mortgage that cost half as much as what he is recommending can totally swing the power your way.
And when you come across financial jargon that don’t seem like they belong on this planet, ask questions about it.
Never just brush off complicated looking words assuming that they meant little.
This also implicitly means that you should read the whole facility contract.
A mortgage contract is not a terms and conditions page of Google or Facebook where there are little consequences for just signing off on it.
It can cost you thousands of dollars more, which you could have saved otherwise. And in extreme circumstances can take away your home.
So decide not to be a victim and get informed.