How to Fight Back Against Bad Loans

Updated: June 4, 2018

Every year, millions of consumers are hung out to dry by unethical lenders that take advantage of people with few options for financial relief. Predatory lenders target people who are in tough spots and hike up interest rates in order to trap them in an expensive cycle of debt.

While payday loans are legal in most states, payday lenders are still obligated to act within state and national law. Unfortunately, many predatory lenders bend the law in order to squeeze even more cash out of their borrowers, and this illegal and abusive behavior can lead to financial ruin for those who might not realize they've been wronged.

But here's the thing: If you've been trapped by a lender who has used illegal tactics—either by charging more interest than is allowed by state law or by using harassment to get you to pay up—you don't have to sit there and take it.

While the stress of being caught in a shady debt cycle might make you want to pack your things, dye your hair, flee the state, assume a new identity, that's probably not the right course of action. For one thing, that unscrupulous lender probably has access to your bank account, which means they could continue making withdrawals you can't afford.

But the best reason to stand up and fight? You have options, and pursuing those options could help save other people from falling for the same predatory scheme.

What is harassment, and how can I spot a lender that's using it?

The predatory and unethical lending practices used by payday and title lenders are no joking matter—these kinds of loans are designed to be hard to pay back. The longer it takes, the more money they can collect from late fees, interest, and rollover charges. Often, the harsh and repetitive collection tactics payday lenders use to get money back from borrowers can be defined as harassment, which is against the law.

According to the Consumer Financial Protection Bureau (CFPB), "Harassment by a debt collector can come in different forms but examples include repetitious phone calls intended to annoy or abuse, obscene language, and threats of violence."

If your lender is calling you 24/7, stopping by your house to demand payment, threatening you with arrest or bodily harm, using profane language, publishing lists of borrowers who can't pay their debts or calling you pretending to be someone else, that counts as harassment, and harassment is illegal.

Debt collectors will shake you down for money that you don't owe.

Many shady debt collectors try and squeeze money out of consumers by accusing them of owing "phantom debt." This occurs when a lender, or someone claiming to be a lender, harasses a person about a loan balance they don't actually have.

According to fraud.org, "The phantom debt collection scam comes in a number of variations, but the common element in almost all of them is a claim that a consumer owes money on a debt and needs to pay or else face serious consequences. Regardless of whether the consumer actually takes out a loan, he or she may receive a call later demanding money be paid."

It's important for consumers to understand that this is illegal. Borrowers experiencing harassment at the hands of loan collector are able to sue for violations of the Fair Debt Collection Practices Act (FDCPA). The FDCPA states that debt collectors cannot lie or mislead you in order to get you to pay up—especially when it comes to a debt you don't legally owe.

How do I report a lender for predatory and abusive behavior?

If you are being harassed by a lender, you can submit a complaint to the Consumer Financial Protection Bureau (CFPB), or contact your state's attorney general. If your personal information has been compromised by an illegal lender, the Federal Trade Commission (FTC) has an entire website dedicated to helping defrauded consumers deal with identity theft.

What about mortgage scams?

Payday and title loans aren't the only kind of bad loans out there. If you're looking to refinance your mortgage, you'll need to be sure to stay clear of the many—sadly common—kinds of mortgage scams out there. Here are a few to watch out for:

• Rent to own scams: A scammer convinces you to give them the title to your home, claiming that you will be allowed to rent it and buy it back when you can afford to. But the terms of the "deal" usually makes it too expensive for the homeowner to ever buy it back, and when the new owner defaults (and they will) you'll be evicted.
• Forensic audit scams: Scammers offer to have a so-called "forensic loan auditor" or lawyer review your mortgage documents to make sure your lender is following all the laws. Of course, you'll have to pay to have this done, and according to the FTC, "there's no evidence that forensic loan audits will help you get a loan modification or any other mortgage relief."
• Fake financial counseling scams: Scammers tell you that, for a small fee, they'll negotiate with your lender on your behalf and get your mortgage payments cut way down. They won't!
• Bait-and-switch scams: Scammers give you papers to sign that they claim will make your mortgage current. In that stack of papers is a document that surrenders your home's title to them in exchange for a "rescue loan."

If you've been scammed by someone offering mortgage relief or refinancing, contact the CFPB, and check out your state's bar association website to find a lawyer who can help.

How do I get out of a bad mortgage?

While there are a lot of scams out there, most mortgages and refinances are legitimate. But that doesn't mean the banks that offer them aren't using predatory tactics that could cause you to default on your loan.

How might a lender sell you on a shoddy mortgage? According to an article from Mortgage 101, "if you had a prepayment penalty or a balloon payment on your mortgage, you may not even be aware of it until you attempt to refinance or your balloon payment comes due. Both scenarios can leave you stuck in a mortgage you cannot afford and prone to foreclosure."

Luckily for borrowers, the Truth in Lending Act (TILA) allows borrowers to completely cancel certain kinds of loan transactions within three days of signing the loan agreement, with no financial penalty. So if you've just signed the paperwork on a mortgage, and then discovered that you actually won't be able to make the monthly payments, you may still be able to back out. During this three-day grace period, you have the right to rescind on home equity loans and mortgage refinancing when the refinancing is done with a different lender than the original mortgage.

Unfortunately, this right does not extend to short-term borrowing, so payday and title lenders are bound by the contracts they sign, even if they realize an hour later they've been had.

How can I come back from a bad loan?

Don't feel bad about getting duped by a bad lender. They've been working on their game for a while now, and their deceptive advertising and unfair terms are designed to trap borrowers who need cash in a hurry.

Instead, take inventory of the debts in your life that you want to get rid of, and consider asking for assistance or looking into a consolidation loan to get your debts under control.