Avoid Car Title Loans and Other Predatory Loans
Thursday, Oct 15 2020
Predatory lending is a term that is typically applied to a lender that lures the borrower into predatory loans that are not what the borrower expected, such as car title loans. Lenders often attract people in less than ideal financial situations and target them for this unethical practice. The financially vulnerable are then faced with high interest rates, numerous fees, and unfavorable predatory loan terms.
The borrower then becomes more financially at risk and it often results in foreclosures and bankruptcy filing. Predatory lenders often prey on people in need of money with low income but that have equity built up in their home or other asset.
What Are the Types of Predatory Lending?
In a poll from Bankrate, 37% of Americans stated that they would have to take out a personal loan, borrow money from a friend or family member, or use a credit card if they were faced with a $1,000 emergency.
However, on average, unexpected expenses cost Americans about $3,500. If you don’t have the aforementioned options – what do you do? For many, turning to predatory loans – such as car title loans – is their only option. This type of loan is tempting when you are faced with an emergency and don’t have savings or good credit. Unfortunately, these loans come with high interest rates that can trap you in a cycle of debt until your car is eventually repossessed.
There are several similar predatory loans that you should avoid at all costs.
- Asset based lending or equity stripping occurs when a loan is made based on equity a person has built up in an asset such as their home, rather than the borrower’s ability to pay back the loan. If the borrower is then unable to make payments, they become at risk for losing their home through foreclosure.
- Bait and switch is when a lender promises one thing in the loan but sells the borrower something different. For example, it could be a higher interest rate or a different type of loan altogether. These changes are usually made at the last second and, sometimes, the borrower is not made aware of the changes to the terms of the loan.
- Loan packing is when the lender charges you for additional products inside of your loan. These extras are not needed to complete the loan but packed in for the lender to get paid more money. The practice occurs when the lender charges customers unearned, concealed, or unwarranted fees. The lender “packs” the loan with unneeded, additional items.
- Loan flipping is when the lender flips the loan without any financial benefit to the borrower. They may repeatedly add extensions, roll overs, refinances, or back-to-back transactions. Loan flipping adds additional time and fees to the borrower. It often creates a cycle that is difficult to get out of as a borrower. Each time the lender “flips” the existing loan, the borrower pays additional fees or points.
- Balloon payments refer to loans that start out with low interest and payments. Borrowers are often lured in by lending predators with the promise of low interest rate only to find out their rate “balloons” in a short period of time. When the rates adjust the payments are excessive and often require the borrower to refinance because they are unable to make payments at this new, increased rate.
- Negative amortization refers to when you take out a loan and the payments are amortized over a certain period. With negative amortization, even when you make a payment the amount you owe goes up because your payment is not enough to cover the interest.
- Reverse redlining. This is a tactic used to target underprivileged or low-income people. The lender typically targets minorities who may have poor credit. Borrowers receive loans with unusually high interest rates. Additionally, borrowers may also receive less counseling and assistance to pay the loans which results in the loss of homes at a higher rate than non-minority borrowers.
- Risk-based pricing. It is appropriate for lenders to charge different interest rates to borrowers based on the risk that they pose. However, it becomes unethical when borrowers are attracted to interest rates below national averages and, once they are locked in, the rate adjusts within a short period often forcing them to default on the loan.
Who is Typically Targeted by Predatory Lenders?
People exploited by predatory lenders often include subprime borrowers, low-income families, people of color, the elderly, military service members, and people in financial crises. People are lured in by promises of low monthly payments, quick access to cash, and a way to get out of debt.
How to Avoid Car Title Loans and Other Predatory Loans
Always work with reputable lenders and financial institutions. If it sounds too good to be true, it often is. This applies to the car title loans we mentioned previously. These loans are called predatory for a reason and you should steer clear of car title loans and others.
Start building an emergency fund so if you are faced with unplanned expenses you have a cushion.
Getting started on an emergency fund isn’t as hard as it sounds. Make a commitment to set aside a portion of your income regularly to build up the fund. Even small regular payments can build up over time. For more tips on setting up an emergency fund read Out of Sight, Out of Mind – How to Build your Savings Fast!
If you don’t have extra income to currently set aside consider a side hustle to bring in extra income.
Before obtaining any loan make sure you read and understand the terms of the agreement. If you need to borrow money, work with a lender that is reliable and honest. Educate yourself on the warning signs so that you can spot a predatory lender.
What Are the Warning Signs of Predatory Lending?
No credit check. If a lender says they don’t need to check your credit this is a big red flag. This means the interest rates are high in order to offset the risk they are taking on. Reputable lenders will need your credit history and credit score in order to develop your loan rate and structure.
High interest rates. Make yourself aware of the current market lending rates. Although several factors determine the exact rate you will receive you should know a ballpark of fair market lending rates. In the above example of a car title loan, the interest rate is typically 25% – which is around 300% APR.
Excessive and hidden fees. You should ask specific questions of any fees that don’t make sense or if you need further explanation. Excessive fees are typically not directly reflected in interest rates and are easy to disguise. You should receive a thorough explanation of any fees you don’t completely understand. Be sure to understand all fees charged as part of the loan.
Prepayment penalties. This is when you are penalized for repaying the loan early or repaying the loan in order to switch lenders. The assumption of predatory lenders is that you won’t be able to pay back the loan, especially when the rate increases. It is to the lender’s benefit to not accept early payments. If you do try to pay back the loan early you are faced with substantial fees and penalties.
If it Sounds too Good to Be True
In our example of car title loans the lender needs to give up the title to their vehicle. Pay a larger than normal fee to borrow the money and then pay the loan on a faster schedule. All of these reasons put car title loans firmly in the category of a predatory loan. It is for all of these reasons that we do not offer these types of loans.
Car title loans tend to sound too good to be true, because it is. You keep the car, but give the title away and you have no safety net. We take care of our members and you should be a member of Focus Federal Credit Union so we can help you get the right type of loan.
Fresh Start @ Focus Federal
Focus Federal is committed to ensuring our customers have financial stability. We know it can be hard to rebuild your credit, which is why we offer several Fresh Start options to help you get back on track.
The Fresh Start Personal Loan from Focus Federal is designed to help you rebuild your credit while simultaneously increasing your savings.
In order to qualify for this loan, you must have six months of verifiable employment history, two recent pay stubs, and opt for a payroll deduction or automatic payment. When approved, you’ll have the option to choose from a $500 or $1,000 loan. When closing the loan, you’ll be face-to-face with a Focus Federal employee and will receive credit counseling.
Once the loan has closed, half of the amount will be placed on hold in your savings account for the duration of the loan. While you’re in the process of repayment, that amount will earn dividends; once the loan has been repaid in full, the funds are released.
Credit Builder Loan
This loan is meant for those – such as young adults – with no credit history at all. A Credit Builder Loan from Focus will help you establish credit.
A borrower must also have six months of verifiable employment history, verifiable income, and may select a loan amount between $250 – $1,000.
If you need help building or establishing credit, Focus Federal Credit Union is here to help. Don’t fall prey to predatory lending – instead, contact us and we can help you get back on track.