Loan Flipping

Full definition

Loan flipping works by exploiting a borrower's financial vulnerability and short-term thinking. Scenario: A borrower has a $10,000 personal loan with 18 months remaining at 22% APR. The lender calls and offers to 'consolidate' into a new $12,000 loan at 21% APR - slightly lower rate, but a new 4-year term, and $2,000 of the new loan covers a 5% origination fee and remaining balance is cash in hand. The borrower gets a lower monthly payment (because the term is extended) and a small cash bonus. But the total interest paid over the new 4-year term vastly exceeds what remained on the original loan. This cycle can repeat every 12-18 months. How flipping harms borrowers: Repeatedly paying origination fees (1%-8% each time) substantially increases the cost of the underlying debt. Extending the loan term keeps the borrower in debt longer and accumulates more total interest. The cash-out component encourages spending beyond debt management needs. Borrowers in a flip cycle may never make meaningful progress toward debt elimination. Regulatory treatment: The CFPB's guidance on UDAAP considers serial refinancing without genuine benefit to the borrower as potentially unfair or deceptive. State regulators in California, New York, and others have specific rules requiring lenders to demonstrate that refinancing provides a 'net tangible benefit' to the borrower. How to protect yourself: Calculate total cost of refinancing (remaining interest on old loan + new loan's total interest and fees) vs. continuing with the original loan. If total cost of refinancing is higher and you are not receiving a materially lower rate, decline. Refinancing to a genuinely lower rate that saves more in interest than it costs in fees is legitimate; flipping for the lender's benefit at the borrower's expense is not.

• Refinance
• Origination fee
• Prepayment penalty
• APR (Annual Percentage Rate)