Protect Yourself From Predatory Lending
Learn how to spot and avoid predatory lending practices so you don’t get stuck with a bad loan
If you’re in the market for a home loan, you may have heard the term “Predatory Lending” before. Here we’ll explain what that means and how to spot predatory lenders so you don’t get stuck in a bad situation!
In a nutshell, predatory lending is when a lender takes advantage of a borrower. The lender might propose unfair loan terms, such as charging the highest possible rates and fees, or a lender may offer the borrower a subprime mortgage (for bad credit) with high interest rates, when the borrower could’ve qualified for a low-rate prime loan. Most people who succumb to predatory lending are first-time or low-income borrowers, and a lack of knowledge about mortgages usually plays a role. In areas where subprime mortgage dealers are prevalent, people often don’t realize there are lower-cost options through different lenders.
The No. 1 way to avoid being taken advantage of is to know the difference between a subprime and a prime mortgage lender. Don’t take the first offer you get, especially if it’s from a subprime lender. Always check with prime lenders to see who offers a better deal! The second best way to avoid unfair mortgage terms is to shop around. If you’re shopping around for your own loan, always check with multiple lenders and see who offers the best deal. Since lenders aren’t legally required to give you the best loan terms possible, it’s up to you to make sure you get the best deal. Finding an independent mortgage broker like The Mortgage Source is one of the best ways to ensure you get the best loan terms possible. Independent brokers will shop around for you and bring you the best offers from several lending institutions – that way you know you’re getting the best deal!
Another thing to do is know your credit score before you shop around for mortgages. You can get your credit score from the three major credit reporting agencies (Experian, TransUnion, or Equifax), either by mail or online for a fee. Check online to see how your score compares to state and national averages to get an idea of the interest rate you should expect from lenders. Credit ratings range from poor to excellent, and the interest rate in a loan offer should be near the state or national average for your level of credit rating.
Borrowers who fall into a predatory loan can end up paying thousands more in interest than they otherwise would have. For example, let’s look at the difference 2.5 percent can make on an interest rate. If someone with a good credit score goes to a subprime lender and gets a 9 percent interest rate on a $200,000 30-year fixed loan, they would pay about $1,600 per month: a total of $380,000 in interest over 30 years. What if they went to a prime lender? They could’ve gotten a 6.5 percent interest rate, which would mean a monthly payment of about $1,300, and a total of $255,000 in interest over 30 years. That’s a $125,000 difference! Always shop around, or have a licensed independent mortgage broker shop around for you!