What is a fraudulent loan?

Definition and Examples of Fraudulent Loans

Fraudulent loans are those that exploit borrowers into accepting predatory repayment terms. Fraudulent lenders take more money from the borrower than they can afford to repay, often through high-interest rates or fees that they did not expect.

How Fraudulent Loans Work

Typically, the lender benefits from the fraudulent loan at the expense of the borrower.
Imagine that you’re looking for a home but can’t qualify for a traditional mortgage because outstanding debts are affecting your credit score. A fraudulent lender calls you several times and offers you a home loan based on the equity built in the home rather than your ability to repay the loan.
Due to your urgent need for a home, you accept the offer and continue with the credit process, unaware that the loan is designed to allow the unprincipled lender to seize your rights to the home. Following the lender’s advice, you even inflated your income during the loan application to qualify. Later, you will find that you cannot afford the monthly payments. Eventually, you will have to default on the loan and face foreclosure on your home. The end result is that you lose the home while the banks incur no losses, as the home’s value exceeds the loan amount when the home is sold through foreclosure expenses.
This is the predatory mortgage loan given through “stripping the rights,” which is one common type of fraud.

Types of Fraudulent Loans

These fraudulent loans can take several forms, but here are some of the most common:
– Flipping: This is a loan arrangement where the lender offers refinancing of a loan with high parts (often like a mortgage) at a slightly lower interest rate, usually within just one year of obtaining the original loan. After factoring in loan origination fees, broker fees, points, and closing costs, you are actually increasing your debt with this loan.
– Balloon Payment: Beware when a mortgage lender tries to sell a loan where the initial payments are low, but there is a large payment due at the end of the mortgage. This large amount is a balloon payment, and this type of mortgage loan is typically offered by fraudulent lenders.
– Negative Amortization: Negative amortization is a fraudulent repayment structure in which the borrower pays less than the interest cost each month. The lender then adds the remaining interest cost to your loan balance. As long as you are in negative amortization, your loan balance grows.
– Packing: Packing occurs when the lender charges the borrower for a service (like credit insurance, for example) that the borrower does not need to increase the loan balance with unnecessary fees.
– Payday Loans: Payday loans are short-term loans due on the sixth of the following month. They are risky because the financing costs on these loans are so high that the annual percentage rate can reach triple digits. If you fail to repay the loan, it can affect your credit score for years.
– Title Loans: Title loans are high-interest, short-term loans that use collateral (like your car, for example) to secure the loan. A title loan is paid back when you provide the title of your car to the lender and receive cash in exchange. If you do not repay the loan in full according to the terms, the lender can repossess your car.

How to Avoid Fraudulent Loans

Fraudulent lenders are usually skilled and persuasive, but there are some simple ways to avoid them:
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Recognizing the signs of a bad loan: High interest rates and fees and penalties, frequent communications, and other high-pressure sales tactics are clear signs of a predatory loan scheme, and it’s time to walk away.
– Read the fine print: Fraudulent lenders are rarely honest about rates, fees, and other loan terms, so carefully read the terms of the loan agreement. Understand your financial obligations (including origination fees, early repayment penalties, and any other closing costs) and avoid any loan you can’t afford. Consult a lawyer if you can’t determine whether the loan is legitimate.
– Report suspicious loans: File a complaint with the Financial Consumer Protection Bureau if you suspect you’ve received a fraudulent loan.
– Pay attention to any strange feeling that something is wrong with the lender and the loan. If the loan seems too good to be true, it likely is.

Alternatives to Predatory Loans

Instead of taking a predatory loan, you might consider one of these options:
– Bank or credit union: Start with a traditional lender like a reputable bank or local credit union. Don’t expect your loan application to be denied. Credit unions also offer alternative payday loans known as “PALs,” which are effective short-term loans with lower interest rates for individuals who need quick cash infusions. They typically offer lower interest rates on loans compared to banks.
– Peer-to-peer (P2P) loans: P2P loans are another option to consider if you’re having trouble getting a loan from a bank or credit union. They are loans provided by investors who have extra money to individuals in the online marketplace, even those with bad credit histories can qualify for these loans.
– Family loans: Ask a close family member for a small loan, but use a written loan agreement to ensure everyone is on the same page and to avoid straining relationships.

Source: https://www.thebalancemoney.com/what-is-a-predatory-loan-4687580