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Predatory lending: what to watch out for

Loans can be a stressful experience, especially knowing that some banks and lenders may try to take advantage of you. Here are some of the warning signs of predatory lending and how you can avoid falling victim to them.

Video Transcript

- Predatory lending occurs when a bank or financial institution takes advantage of you by charging higher-than-normal interest rates, unreasonable fees, and certain other charges. It can occur on many different kinds of loans and financial products.

There are lots of red flags to be aware of that can be helpful in avoiding a predatory lending situation. By reading the fine print and asking questions before finalizing the loan, you can protect yourself and your family and save money.

The signs of predatory lending include prepayment penalties, meaning loans that charge high fees for paying off the loan early; excessive fees; higher-than-average interest rates that significantly exceed competitive interest rates; exploding adjustable interest rates; encouraging consumers to repeatedly refinance a home with high fees and points for each refinance that drains a home of equity; hidden balloon payments-- in other words, a large payment at the end of a loan period that may run into tens of thousands of dollars that isn't revealed upfront; bait-and-switch loans with a high interest rate and fee that is sold in place of a loan with lower rates and fees; high fees on taxed refund loans, meaning interest rates on these short-term loans can exceed 500%.

There are lots of state and federal laws designed to curb predatory lending. 15 states have banned payday loans with high interest rates, while others limit the number of payday loans that can be taken out by a consumer in one year. The federal government also put in place new rules designed to protect homebuyers from predatory lending in mortgage lending.

If you believe you've been a victim of predatory lending, the federal Department of Housing and Urban Development has online resources to help. Stay financially fit, friends.