The term “predatory lender” refers to a loan provider who approves loans for those who aren’t likely to be able to pay them back.
The term became popularized during the 2008 financial crisis when many lenders were found to have approved mortgages with little regard for the borrower’s situation.
But, what if the “prey” were given the tools to fight back?
That’s what the Consumer Financial Protection Bureau (CFPB) aims to do with their “Know Before You Owe” program.
This new initiative is designed to provide consumers with the information they need about mortgages, auto, and student loans.
By educating potential borrowers on the realistic cost of a loan, the CFPB hopes to reduce the instances of predatory lending and empower borrowers to make smart decisions.
This is our first blog post in a two-part series on this topic. Read on to learn more about the program’s approach to mortgages and auto loans, and be on the lookout for post number two covering student loans.
The “Know Before You Owe” program for mortgages includes an interactive loan estimate sheet – also known as a “shopping sheet” – explaining everything from Private Mortgage Insurance (PMI) to estimated escrow payments. The program’s goal is to prevent people from taking out a loan without knowing how much it will really cost.
Included in the shopping sheet are questions borrowers should ask a lender, like:
- Will my loan amount change after closing?
- What other services can I shop for? I.e. appraisal fees, credit report fees, etc.
- What is the late payment penalty?
- Is there a prepayment penalty?
- Can I refinance this loan?
The shopping sheet also compares different loans to identify the best deal based on interest rates.
A loan breakdown shows the mortgage costs in terms of how much it will be overall instead of how much it will cost every month. This comprehensive view will give borrowers a more complete perspective of what they’ll actually pay throughout the life of the loan.
Mortgages are typically the largest loans the average American will take on, and they can last up to 40 years depending on the specific term.
Therefore, it’s important for borrowers to understand what they’re signing up for – especially if they’re going to be paying the loan back for several decades.
According to the CFPB, car loans make up the third-highest credit total for Americans, right after mortgages and student loans.
Unfortunately, for many consumers, this often means entering into an agreement they don’t fully understand.
This exact buying scenario is what triggered the CFPB to create the auto loan shopping sheet, including a list of questions to ask a salesman at the dealership. These questions are designed to help a buyer uncover details like delivery charges, additional features, title fees, and state and local taxes.
Similar to the mortgage shopping sheet, the auto loan sheet provides a comparison of different financing options to see how much interest will be paid over the life of the loan.
As a borrower, this gives you a clearer picture of how much money you’ll pay in interest before signing the dotted line and driving away.
For example, a $15,000 car loan with a 5 percent interest rate over four years will cost $990 more in interest than a two-year loan with a 6 percent interest rate.
This level of detail may also convince a buyer to purchase a less expensive vehicle or get a loan with a smaller interest rate or term.