One main issue that has been putting the payday lending industry in controversy is related to predatory lending. Borrowers of payday installment loans are now uncertain about these loans because they might be dealing with lenders who are into predatory lending practices.
“Predatory lending” has become the shorthand for describing a variety of lending practices that may be disadvantageous to borrowers. Abusive or predatory lending may involve fraud or deception, manipulating borrowers through aggressive sales tactics or taking unfair advantage of a borrower’s lack of understanding about payday installment loan terms. These practices occur most frequently in the sub-prime lending market and usually target lower-income and minority borrowers.
Though the term “predatory lending” covers a potentially broad range of behavior and does not lend itself to a concise or comprehensive definition, many of the lenders of payday installment loans have been accused of such practice. However, predatory lending typically involves at least one and perhaps all three of the following elements:
· unaffordable loans based on the assets of the borrower, rather than on the borrower’s ability to repay an obligation (also called “asset-based lending”)
· encouraging a borrower to refinance a loan repeatedly in order to charge higher interest and fees each time the payday installment loan is refinanced (also called “loan flipping”)
· fraudulent or deceptive lending practices to conceal the true nature of the payday installment loan obligation from an unsuspecting or unsophisticated borrower.
This is why it shouldn’t be generalized that all lenders of payday installment loans are into predatory lending practices. There are many lenders who are careful and value their reputation and want to deliver quality lending services to their consumers.
Here are some ways that borrowers can avoid being a victim of these malicious lending practices:
1. Shop around before signing any contract.
2. Ask lenders about “Upfront Fees.”
3. Make sure to deal with a licensed lender.
4. Ask for a “Good Faith Estimate.”
5. Have some idea what you should qualify for.
6. Find out if your monthly payments will change during the loan term.
7. Find out if there is a “balloon” payment due. Watch out for payday installment loans that are paid in small monthly payments, but require a big “balloon” payment at the end of the loan period.
8. Request a review of your settlement sheet three days before closing.
9. Find out if you have a three-day “right of rescission.”
10. Do not sign any waiver of rights.
11. Verify if the loan amount includes various insurance policies.
12. Find out if your taxes are included in your monthly payment.
13. Make sure that you are not pushed into the loan process.
14. Ask if the loan has a prepayment penalty.
15. Read all documents carefully before signing.
16. Most of all, do not sign any documents with blank spaces.
The Consumer Financial Protection Bureau has created the Ability to Repay Rule to prevent predatory lending practices. This is a set of guidelines for lenders that are designed to protect consumers from predatory lending. The new rules force lenders to take responsibility for the loans they write.
According to the agency the Ability to Repay requires that:
· Potential payday installment loan borrowers have to supply financial information and lenders must verify it.
· To qualify for a payday installment loan, a consumer has to have sufficient assets or income to pay back the loan.
· Lenders will have to determine the consumer’s ability to repay both the principal and the interest over the loan term.
Predatory lending practices can be prevented. All it takes is a responsible lender and a vigilant borrower.