Legal Protections Against Predatory Lenders While Applying For A Debt Consolidation Loan

Legal Protections Against Predatory Lenders While Applying For A Debt Consolidation Loan

Debt consolidation involves converting high-interest rate debts into relatively lower-rate debt for reducing total interest costs. Homeowners who have huge amounts of credit card debts but have unused borrowing power because of their home actually has a debt consolidation option open to them. As per, “You can consolidate your existing credit card with a personal loan (also known as a credit card consolidation loan). A personal loan is an unsecured loan typically from $1,000 – $100,000 typically with a fixed interest rate that can be used to consolidate debt. Interest rates on personal loans are often much lower than the interest rates on credit cards, which typically range from 10-20% (or higher).” However, while applying for a debt consolidation loan, you must steer clear of the predatory lenders.


In this context, we know that predatory lending actually is supposed to be any kind of lending practice which imposes abusive or unfair terms on the borrower. This sort of practice involves convincing the borrower to actually agree on accepting the unfair terms via coercive, deceptive, unscrupulous, or exploitative actions for such a loan that the borrower in question is not able to afford. By seeing the definition itself, we can understand that predatory lending has been designed to benefit the lender and operate in the best interest of the lender and this would be hampering the borrower’s the capacity to effectively repay the debt. These enticing lending tactics are crafted to take undue advantage of the lack of borrower’s relevant knowledge, understanding, and information about finances, loans, and the terms. You may browse through for perfect solutions to debt-related issues.

While predatory lenders’ practices may not be regarded as illegal, they could ruin your credit, burden you with an incredible amount of debts and even make you homeless. We know that predatory lending may be in the form of car loans, ‘tax refund anticipation loans’, payday loans, and all types of consumer debt.

Predatory Lending Practices

False or Inadequate Disclosure

The lender would be hiding or misinterpreting the actual risks, costs, and even the appropriateness of the terms of the loan. In certain cases, the lenders may even modify the loan terms despite the initial offer.

Fundamentally Risk-Based Pricing

Even though all lenders rely on some sort of risk-based pricing, predatory lenders actually resort to abusing the practice simply by charging exorbitantly high interest rates, especially to high-risk borrowers. These borrowers have high chances of defaulting.

Exaggerated Fees and Charges

The costs and fees, for instance, the closing costs, appraisals, document preparation fees etc. are much higher as compared to the ones charged by renowned lenders and are hidden quite frequently in fine print.

Asset-Based Lending

Borrowers are often brainwashed into borrowing more amount than they could actually afford to when a lender is ready with an offer of a refinance loan depending on their home equity amount instead of their income or the capacity to repay.

Abnormal & Absurd Prepayment Penalties

A borrower who tries to pay off the actual loan before the due date may have to face a really abusive prepayment penalty. This is quite a common practice among the scammers or the predatory lenders. They deliberately incorporate a prepayment penalty in loan contracts or agreements. We know that a prepayment penalty involves paying a special fee to the lenders as a penalty for paying off the loan much before the due date. This would usually occur when borrowers get the opportunity to refinance for taking advantage of a far more affordable and favorable interest rate. Prepayment penalties are supposed to indirectly discourage a borrower from thinking of paying off his loan earlier than the agreed due date.

Cleverly Planned & Executed Mandatory Arbitration

The lender would be adding language to your loan contract to make it illegitimate for a borrower to consider taking any legal action in future for misrepresentation or fraud. The abused borrower is compelled to seek arbitration that would usually, place the borrower at a massive disadvantage.

How to Safeguard Yourself from Predatory Lenders

The best way to prevent predatory lenders from taking advantage of you is to equip yourself with more knowledge. It is high time you educated yourself regarding all their deceptive practices. You must necessarily watch out for:


You must stay away from dealing with any lenders who would be promising you that he would be getting your loan approved despite irrespective of your credit rating and credit history. You must do your own research and get your credit report’s copy. Do some studies to find out what exactly you should be qualifying for.

Unlicensed Loan Offers

You better watch out for loan offers that are sent via mail or door-to-door solicitations or telephone. Renowned and reliable operators are not supposed to operate in this fashion. You must ensure that the lender you are officially working with has the relevant license.

Being Rushed or Pressured to Sign Papers

You must not allow predatory lenders to rush you and compel you to sign a loan contract. You must take your own time and scrutinize the relevant documents and do the paperwork very carefully. You must avoid signing anything you fail to understand or refuse to agree with.

Exorbitant Fees & High-Interest Rates

You must not accept incredible demands for fees or exceptionally high-interest rates. It is best to refuse payments right at the outset if you think you simply cannot afford the high fees and interests. You must not hesitate to decline any extra services included in the loan such as health insurance or credit. You must do ample research to determine the loans that come at best deals.

Blanks or Gaps in Documents

You must refrain from signing any documents that are containing unexplained gaps and blank spaces. You must carefully read the loan document and get it examined by a close relative or trusted friend.

Conclusion: Take Note of the Legal Protections, the Existing Laws

Federal laws would be protecting consumers against the unfair practices of the predatory lenders. The ECOA or the Equal Credit Opportunity Act makes it illegal for any lender to even consider imposing relatively higher fees or a higher interest rate based on the factors such as the borrower’s color, race, religion, age, sex, national origin, or marital status. Moreover, the HOEPA or the Home Ownership and Equity Protection Act is in place for safeguarding consumers from exorbitant fees and irrationally high-interest rates. You must realize that loans that are regarded as ‘high cost’ would be subjected to additional restrictions and disclosure requirements. Moreover, 25 states are having anti-predatory lending laws and also, 35 of the states actually restrict the maximum amount of prepayment penalty which becomes compulsory for a homeowner.