What is Predatory Lending?

Nicole Madison
Nicole Madison

Predatory lending is the practice of using unfair, deceptive, and abusive tactics in lending money. Unscrupulous lenders in the mortgage and consumer lending industries take advantage of borrowers who are less knowledgeable about lending practices, getting them to agree to loan terms that are not only less than desirable, but also financially damaging. Predatory lenders also target borrowers who are so desperate to obtain loans that they will agree to nearly anything.

Predatory lending has been linked to telemarketers.
Predatory lending has been linked to telemarketers.

Often, people with poor credit are primary targets for lenders who engage in predatory lending practices. Individuals with low incomes are often targets, as well as women, senior citizens, and minorities. However, individuals from all backgrounds, income levels, and walks of life can be victims of predatory lending.

Many consider payday loans predatory lending. Typically, these short-term loans are offered to individuals without regard to credit. Though these loans are relatively easy to obtain, they are granted at unreasonably high interest rates. In fact, an individual who borrows from a payday loan company may pay more than 100-percent interest over the life of the entire loan. With interest rates so high, many payday loan borrowers find repaying their loans very difficult.

Predatory lending is not limited to short-term lending. It is all too common among unscrupulous mortgage lenders. These mortgage lenders offer loans at very high interest rates, requiring borrowers to agree to terms that are unfair and damaging. For example, a predatory lender may include unfair prepayment penalties or balloon payments in a loan agreement. Often these terms are hidden within very technical language, making it difficult for the borrower to fully understand what he or she is agreeing to.

Another example of predatory lending involves consumer loans that are backed by collateral. These loans often carry extremely high interest rates and require the borrower to offer a house or car as collateral. If the borrower defaults, the lender may take possession of the borrower’s property and sell it to repay the loan. If the lender sells the collateral for more than the amount of the loan, the lender may actually make a profit on the defaulted loan.

To avoid falling victim to predatory lending, avoid lenders that advertise guaranteed loan approval. Also, be wary of loans advertised through telemarketers or traveling salespeople. Thoroughly research the lending company you are considering to learn if it has been accused of predatory lending. Read all loan agreements carefully before you sign and make sure there are no blank spaces on your loan document. It is also wise to consult with a lawyer before you sign a loan document.

Nicole Madison
Nicole Madison

Nicole’s thirst for knowledge inspired her to become a wiseGEEK writer, and she focuses primarily on topics such as homeschooling, parenting, health, science, and business. When not writing or spending time with her four children, Nicole enjoys reading, camping, and going to the beach.

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