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Beware of predatory lending practices

Don’t take the bait when predatory lenders try to reel you in. Recognizing and avoiding these scams can save you many financial headaches in the future, including high debt, ruined credit and even the loss of your home.

Predatory lending typically refers to lending practices which impose deceptive, unfair or abusive terms to borrowers. Many of these practices are illegal. Others are legal, but not in the borrower’s best interests. Common predatory lending techniques include payday loans, car title loans, and subprime mortgages.

Creditors often target those with limited financial resources and those who need emergency cash (e.g., paying medical bills, making a home repair, car payment) or even victims of natural disasters. And it’s not just criminals who practice predatory loan tactics. Sometimes creditable banks, finance companies, and other retailers can practice these deceptive tactics.

Watch for exceedingly high-interest rates or inflated fees that are additional to the loan’s interest rate. Always look carefully through the entire loan package. Ask for an explanation of fees, charges or terms and conditions if you are not comfortable with them. The Truth in Lending Act protects consumers and legally requires lenders to provide you with loan cost information so that you can comparison shop for loans.

Be wary of refinance offers that come out of the blue including loan solicitations from telemarketers and door-to-door sales, as well as pitches for home equity loans related to unsolicited home improvement contracts. If you are considering taking out a loan, make sure it provides a benefit to you, like reduced interest rates.

Compare loan offers and terms from multiple lenders. Do not let lenders steer you into more expensive products when you may qualify for mainstream loans. You can also ask the lender if they will waive or reduce the loan fees or charges associated with the loan.

Beware of “bait and switch” tactics. This is when a lender initially offers one set of terms, but then pressures you into signing a contract with more expensive terms or turns around and shows you there were other fees or conditions. Additionally, if you feel pressured by a lender to sign a loan contract right away, just walk away. If the offer is good today, it should be good tomorrow.

Other popular predatory loan practices you will find are advance fees schemes, Internet payday loans, and service scams.

The most common is the phantom help scam. This is where fees are charged for “services,” which actually are just paperwork and telephone calls the consumer could easily handle. Other examples of this include lease-back or repurchase, refinance, Internet and phone scams.

Advance fee schemes are often presented as “nofee” or “no-cost” loans, where the organization will request payment upfront for the “first payment” or “insurance.” After that, however, no loan is provided.

Internet payday loans will use automated clearing house (ACH) transactions to deposit and deduct funds from a borrower’s account. In Kentucky, this is illegal. Kentucky law requires a check to be presented at a licensed location. Internet payday loans can lead to overdrafts with fees that can add up quickly.

Remember, if the loan sounds too good to be true . . . it probably is!

More information on predatory lending is available at the U.S. Department of Housing and Urban Development at www.hud.gov/states/kentucky/ homeownership/predatorylending or the Kentucky Department of Financial Institutions at kfi. ky.gov/. More information on family finance education is available at the Letcher County office of the University of Kentucky Cooperative Extension Service.

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