Most lenders value their customers and want to give them the best possible loan options. If you need to borrow money and your credit is good—or can be improved with extra effort—you may qualify for a loan with reasonable interest rates. Just make sure that the loan is for only the amount you need, is from a source you can trust, and has a monthly loan payment you can afford.

Most lenders are trustworthy—but unfortunately, some lenders are not. They sometimes direct borrowers away from loans with more affordable interest rates. Instead, they offer loans that carry very high interest rates, questionable fees, and unnecessary charges. These practices are considered predatory lending.
A predatory lender may be a large company with a name you know. Or it may be a small company or a loan broker you’ve never heard of. But predatory lenders have many of the same traits. For example, they:

■  offer loans based solely on the equity in a home, not on the borrower’s ability to
    repay the loan

■  charge unusually high interest rates for loans

■  add excessive points to a loan without lowering the interest rate

■  include excessive fees

■  tack on unnecessary costs, such as prepaid single-premium credit life insurance

With or without these extra charges, you may find it difficult or even impossible to repay the loan. If you fall behind in your payments, more charges may be added. Or the lender may suggest that you refinance the loan to lower your monthly payment. But the unpaid payments may be added to the new loan amount, costing you even more money over time. Then the loan becomes even more difficult to repay. If you can’t make the payments, you could lose the items you purchased or used to secure the loan.

Most often, the victims of predatory lenders are low- and moderate-income persons, minorities, and the elderly. But anyone—including you—can be misled by a predatory lender. You may want to consolidate credit-card debt or buy your first home. If you already own your own home, you may want to make repairs to it. Your reasons for a loan may be good, but if you agree to an unfair loan, you could lose your home!

How can you get the best loan?

■  Shop around for the best loan for your situation. Ask in places where you feel
    comfortable, such as a bank, credit union, or a local nonprofit housing or consumer
    credit-counseling agency. To confirm current interest rates, look in the business or
    real estate section of your local newspaper. Call more than one bank, savings and
    loan, or mortgage company.

■  Borrow only the amount you need and can afford to repay. You may be encouraged
    to borrow more than you need. So before deciding on a loan, be clear about how
    you will use the money and how you plan to pay it back. If you are already in debt
    and having problems making your payments, you probably shouldn’t borrow more
    money.
    Instead, try to negotiate a payment plan with your current lenders.

■  Understand exactly how much the entire loan will cost. Review the complete
    payment schedule. Be sure to find out how much you will have paid in total when
    the final payment is made. Above all, beware of loans with one large “balloon”
    payment at the end. If you have difficulty making the final payment when it is due,
    you may have to refinance the loan to make the balloon payment. If your original
    loan does not guarantee a new loan with reasonable rates, the refinanced loan can
    cost you even more money because of additional points and fees.

■  Make sure that the loan fees are reasonable. In most cases, loan fees should not
    exceed 5 percent of the loan amount unless you are paying more for a lower
    interest rate. For example, if the loan amount is $70,000, the loan fees should not
    exceed $3,500 ($70,000 x .05 = $3,500). However, there are some situations that
    may cause the loan fees to be higher. If you’re not sure, ask a trusted advisor such
    as a nonprofit housing counselor.

■  Read every word in a loan document, and check everything for accuracy. Don’t
    accept loan terms just because the lender says they are “standard.” Make sure you
    understand the reason for—and effect of—every loan term before you sign.

■  Do not be pressured into signing for a loan you can’t afford. But if you do get
    pressured into signing for a loan you can’t afford, act fast. You have a legal right to
    cancel, or “rescind,” a loan contract when your home is used as security for a
    home-equity loan. But you must generally cancel the loan in writing within three
    business days of signing the loan documents.

■  Never sign an agreement that you don’t completely understand. And don’t take a
    lender’s word that an agreement is “standard.” If the agreement seems
    unreasonable, or uses terms that are unfamiliar to you, ask for a complete copy of
    the loan agreement. Get a second opinion from someone you trust before you sign
    the loan agreement. Bring it to your advisor or local nonprofit housing or consumer-
    credit counselor to review it.