Typical and Unfair Lending Practices

The Loan Doesn’t Reflect Your Ability to Repay It

It used to be hard to take out a loan, because lenders lost out if you couldn’t repay.  Now, lenders often profit most from those who can’t repay their loans.  You may have a loan that your lender knew you couldn’t repay, because the lender wanted to profit from you by charging you “penalty” fees and interest rates when you fall behind.

Posting Cut-Offs

Some credit card companies set cut-off times for crediting payments to customer accounts at 9:00 or 10:00 a.m. If you payment comes in after those times on the due date, the credit card company charges a late fee. Being late, even once, can also trigger a penalty interest rate.

Adjustable Rate And Interest-Only Loans

Adjustable rates and interest-only-payments give you a false sense of control over your loan (often your mortgage).  At first, the monthly payments fit your finances, but the low payments don’t last.  Rates rise due to changes in the larger economy or the structure of the loan, and the new higher bill comes as a surprise to you.  All of the sudden, you cannot afford to make the payments—and you risk losing your home.

Universal Default Clauses

The fine print in a lending agreement almost always includes the provision that the lender can impose penalty rates if you’re late on a payment to another lender, even if the you are fully current on payments to that lender.

Mandatory Arbitration Clauses

The fine print on many, if not most or all credit card agreements, says that in the event of a dispute you must use the lender’s “arbiter” to settle it, instead of going to a neutral court. This clause waives your right to a court date, to a jury trial, to the award you might receive if she went to court, and to an unbiased judge.

Prepayment Penalties

This is a fee charged by a lender if the you pay a loan off early, or pay more each month than you are billed.  In mortgage loans, prepayment penalties appear almost universally for people with imperfect credit histories.  Prepayment penalties can be very expensive—several thousands of dollars—and extend up to the first five years of the loan or longer. If you can’t afford to pay the huge penalty, this prevents you from refinancing into a loan with a lower interest rate or better terms, and you’re stuck with your original high-cost loan.

Your Expensive Loan was Targeted to You because You’re…

… a student, a minor, in the military, a senior citizen, a recent immigrant, a single parent, or member of a minority group.  Lenders will identify individuals and groups who are more likely to accept overpriced loans due to language barriers, confusion, desperation, lack of information, or susceptibility to deceptive tactics.

You Actually Qualify for a Cheaper Loan

Research shows that one-third of those offered sub-prime mortgages are qualified for prime mortgages.  Sub-prime mortgages are more profitable for lenders, but very costly for homeowners, and result in foreclosure much more frequently than prime mortgages.

“Penalty” Interest Rates and Fees

Penalty interest rates (meaning double or triple the regular rate) are triggered when you’re late on one or more monthly payments – or for any other reason at all.  Late fees are also charged, and you often pay much more than the infraction warrants.  For example, credit card late fees average around $38 – far more than your being late actually costs your lender.

Balloon Payments

A balloon loan is structured with one large payment, usually at the end of the loan. The initial monthly payments are usually artificially low to entice you, but these low payments are not actually paying off the money you borrowed. At the end of the loan term, you will owe the same, more, or slightly less than the original amount you borrowed, even after making monthly payments.  This last payment is called the “balloon” payment, since it “inflates” and is much larger than the initial, smaller payments.

High Loan-To-Value Mortgages

This is a mortgage loan that is as high or higher than the market value of the home.  These loans usually involve a falsified appraisal of the home, where you are told that the home is worth more than its true value.  Because you owe your lender more than the home is worth, you can’t sell it and pay off the mortgage, or refinance with a better, reputable lender.

Beware these loan types:

Payday loans, refund anticipation loans, car title loans, and foreclosure “rescue” scams are pretty much always a bad idea.  Avoid these products at all costs.