Using “payday loans” as a business model, HFC and Beneficial Finance once used the model for second mortgages. Although it may not be the best deal for the borrower it is a sweet deal for the lender. American homeowners who never considered a loan from the shady underworld of “pawn your title” and “payday loans” did not see HFC and Beneficial for what they were – the same business model waiting to spring a trap on unsuspecting consumers. Like the hawkers on the midway at the fair, looks were deceiving.
Balloon payments are another way consumers get caught. The arrangement is commonly used to reduce a borrower’s monthly payment. The final or “balloon” payment is used to make up the difference at the end of the loan. A predatory lender may entice consumers with signs that say, “Low Monthly Payments,” then conveniently fail to disclose the balloon payment waiting down the line. In some cases, if the monthly payments are too low, that balloon payment could almost be as high as the principal of the original loan. If the loan is secured with the borrower’s home and he or she cannot make the balloon payment, the borrower faces foreclosure. Sometimes a borrower has to refinance the balloon, and the cycle starts all over again.