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Learn the difference between subprime and predatory lending.
What is subprime lending?
Borrowers with less than average credit may have trouble getting a conventional home loan. In these cases, a subprime loan may be the only option for financing homebuying. Subprime loans typically have higher interest rates and fees. This is because they serve higher-risk customers. Subprime loans are intended to last for the short-term, about 2-4 years. This gives the homeowner a chance to pay debts and improve their credit. After this period, homeowners will likely qualify for refinancing or getting a lower risk, lower rate loan.
What is predatory lending?
Predatory lending often happens when borrowers try to get a subprime loan.
Unlike subprime lending, predatory lending involves deception or fraud. The lender lies to or manipulates the borrower. The lender may use aggressive sales pitches or take advantage of the borrower's understanding of complex loan terms. Predatory loans often include terms that are bad for the financial health of the borrower. These terms include loan flipping, excessive fees and very high interest rates, lending without regard to the borrower’s ability to repay, and outright fraud and abuse.
Protect yourself from predatory lending
- Get educated about your rights. The City offers free homebuyer workshops.
- You can back out of your agreement within 3 days of signing.
- Get advice from the Housing Assistance Center if you feel like you have been a victim of predatory lending
- Get legal counseling if you are in default or delinquency