The biggest shopping weekend of the year is fast approaching! Black Friday will kick things off on November 24th before we move onto Small Business Saturday and Cyber Monday. Many people across the nation will be out shopping for holiday gifts, and the urge to spend is stronger at this time of year than in any other season. Unfortunately that urge is what can make us easy targets for “predatory lenders”.
Predatory lending is any lending practice that imposes unfair or abusive terms and that convinces a borrower to accept a loan that the borrower doesn’t really need or can’t afford. At this time of year, many lenders offer special holiday loans to help cover the expense of shopping. In this blog I’d like to talk a little about how to recognize and protect yourself against predatory lending practices.
Loan flipping is a lending practice that disguises itself as debt consolidation. A customer is urged to refinance one or more existing loans into a single large loan. However, the lender may include a higher interest rate or additional fees. If you receive offers to consolidate, be sure to pay attention to the interest rates and to the total amount of payment. You may find yourself paying a larger overall amount than you were by paying your existing debts individually.
Balloon Payment Loans
Balloon payment loans may also be a sign that a lender is trying to take advantage of you. A lender may offer great terms on a loan but include one or more large payments later in the loan term. Predatory lenders will include payments that are so high that you can’t afford them when they come due. Then the lender will offer to refinance the remaining debt into yet another loan, including refinance fees and/or a high interest rate. Be aware of any balloon payments that may be part of a loan structure. A good rule of thumb is that if you couldn’t afford to pay the balloon payment today, then don’t count on being able to make that payment in the future.
Negative or Minimal Amortization
Negative or minimal amortization is another deceptive practice that can be disguised. Negative amortization happens when your monthly payments aren’t enough to cover the interest that accrues. If this happens, then you can wind up owing much more money than you ever borrowed in the first place. Minimal amortization would be a situation where your payments are only just enough to cover the interest, essentially leaving you in financial limbo. Your payments don’t actually go toward lowering the amount owed so unless you pay extra each month the debt will last indefinitely. Always check the loan documents carefully to see how much of your monthly payments are going toward interest and how much is being paid on the principal loan balance. If the monthly payments seem too good to be true, they probably are!
Hopefully some of these tips will help you avoid financial pitfalls. If you are looking at your holiday budget and realize that you are overwhelmed with bills, consider making an appointment to speak with one of our experienced bankruptcy attorneys. At Bond & Botes we offer free initial consultations at all of our convenient locations in Alabama, Tennessee, and Mississippi. No matter what kind of debts you’re facing, we specialize in helping people find a way back to financial stability.
Nick Gajewski is an Associate Attorney at the Bond & Botes Law Offices in Florence and Haleyville, Alabama. He holds a Bachelor of Arts from the University of Alabama, and a Juris Doctorate from the University of Alabama School of Law. Nick joined the team of Bond & Botes bankruptcy lawyers back in 2014 and has been helping clients navigate financial issues since. Read his full bio here.