Getting out of debt can be a nightmare. However, consumers can avoid these situations by never getting into a compromising situation to begin with.

Predatory lending practices are one of the major causes of bloated consumer debt. They are a black hole, causing borrowers to get in way over their heads and often leading to foreclosure, bankruptcy and complete destruction of personal finances. In this case, as in all cases, knowledge is power. If you are able to recognize a predatory lender, you’re much more likely to avoid being a victim. Here are some red flags.

Watch for Unreasonable Fees and Penalties

Depending on the strength of the borrower’s credit, fees and penalties are fairly typical. However, you can recognize a predatory loan by crunching the numbers.

Fees are easy to hide in the excessive paperwork and red tape of a major loan. But once you isolate them, they should only add up to about 1% (or less) of the total amount of the loan. Anything higher should raise some concern. As a comparison, some predatory loans have the unsavory distinction of have fees that are 5% or higher of the total amount.

Be Wary of Unnecessary Refinancing

Refinancing can benefit the borrower by reducing interest rates and cutting down on the total amount paid over the long term. But this is not always the case.

Every time you refinance, there are more fees. Some lenders refinance in bad faith in order to accumulate the extra cash without helping the borrower in any meaningful way. Moral of the story: know exactly what you’re getting out of the deal. Be skeptical; we’re living at time when consumer vigilance is expected, and indeed necessary. When dealing with a large amount of money that you’ll be repaying over a long period of time, be sure you are comfortable with the terms. You’ll be thankful later.

We’ll continue this discussion of predatory lending in our next post. Questions? Give our attorneys a call.

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