The article concerns the question – What are Predatory Loans? Predatory loans occur when lenders create loan conditions that leave the borrower in a position in which they will end up paying far more for their loan than they reasonably should. This usually happens with mortgages and normally targets people who would have trouble getting a regular mortgage. These are the so called subprime mortgages in which people with poor credit or low incomes are given mortgages that they wouldn’t have qualified for at a normal bank.
These loans usually come with conditions that result in the borrower paying far more than they should have to and in many cases being unable to make their payments. The lenders can get away with this because the borrowers have no other options to get a mortgage.
The normal way that predatory loans take advantage of borrowers is by including excessive fees. Almost all mortgages come with fees attached to them but the fees that come with predatory loans are often as much as five times those that come with a regular mortgage.
Another trick is to require the borrower to take out insurance, bought through the lender of course, in order to get the loan. Since most people focus almost solely on the interest rate when they take out a mortgage most people have no idea how much they are going to wind up paying in fees and all the other extras that the lenders tack on.
Another common practice of predatory lenders is to make it virtually impossible to move into a new mortgage. Since people who take out these types of mortgages usually have bad credit they can often improve their credit over the course of the mortgage. In fact simply making the payments will improve their credit. This means that at some point the borrower will likely qualify for a regular mortgage and be able to save a lot of money by refinancing their subprime mortgage.
Obviously this isn’t something that the predatory lenders want so they include prepayment terms that make it virtually impossible to refinance. All mortgages come with prepayment penalties if you want to pay off your mortgage early and replace it with a new one. However predatory loans come with prepayment penalties that are so high that trying to refinance would eat up all of the equity in the house.
Since they know that they are operating with questionable practices most predatory lenders also trick borrowers into signing away their legal rights. Usually hidden somewhere in the mortgage is a clause that requires borrowers to sign away their right to sue the lender. This is usually phrased as something about requiring arbitration. The problem is that the lender controls the arbitration process. The unfortunate reality is that if you take out a predatory loan you will likely find that you have no legal recourse when you come to the realization that you are being taken advantage of by the lender.