Predatory Lending

Predatory lending summary: 

• Predatory lending involves unscrupulous lending practices that lure borrowers into taking out unfair loans with unfavorable terms. 

• The lender takes advantage of borrowers when it engages in predatory lending. 

• Examples of predatory lending include offering loans without fully disclosing high fees or clauses in the loan that are designed to make repayment harder. 

Predatory Lending Definition and Meaning

Predatory lending refers to lending practices that are designed to trick borrowers into taking out loans with unfair or abusive terms. 

Lenders who engage in predatory lending act deceptively or dishonestly. They may pressure you to act quickly, and they take active steps to ensure you don't understand the details of your loan or why it’s a bad deal for you. 

Predatory lending could be a certain type of loan, such as payday loans or car title loans. It could also mean deceptive lending practices that trap borrowers into a bad contract.

Predatory Lending Key Features 

Predatory lending often involves lenders being misleading about or hiding the terms of a loan agreement. For example, lenders may engage in fraudulent or deceptive practices to prevent you from fully realizing the:

• Fees involved in borrowing

• Total interest costs you will pay over time

• Unfavorable loan terms, such as hidden balloon payments that require you to pay a large sum of money at the end of the loan term

Often, predatory lenders use aggressive sales tactics to convince you to take on unaffordable or financially harmful loans. They may pressure you to act quickly, before you have time to understand what you are agreeing to, and they could make misleading statements so you don't fully understand the terms of the loan.

Anyone can be a victim of predatory lending, but elderly and low-income individuals are often targeted. People who are strapped for cash are particularly vulnerable, since they may not have credit scores high enough to give them access to other loans or credit.

Types of Predatory Lending

Predatory lending generally falls into one of two categories: predatory lending practices or predatory loans. 

Payday loans 

Payday loans are short-term, unsecured loans often marketed to people desperate to borrow quick cash. Repayment is typically due on the borrower's next payday. Payday loans have extremely high rates that may seem reasonable upfront. 

Payday loans carry fees ranging from $10 to $30 for every $100 you borrow. A two-week, $300 payday loan that charges $15 per $100 would cost $45. Since the loan term is so short, that translates to an APR of nearly 400%. 

Payday loans are banned or heavily regulated in 21 states and Washington, D.C. Other states set caps on interest rates, fees, and loan amounts. Many payday borrowers are unable to repay the loan on time and need to renew the loan, which substantially increases the amount of the debt. 

Car or vehicle title loans 

Car title loans are secured, short-term loans that use the borrower's car title as collateral. The lender keeps the title until the loan is repaid. If the borrower defaults, the lender could take possession of the vehicle. 

Vehicle title loan amounts range from 25% to 50% (or even up to 100%) of your vehicle's value. Loans are often 15 to 30 days, with extremely high interest rates—up to 300%.

Motorcycles, boats, RVs, or sometimes valuable collectibles can also serve as collateral for a title loan. 

Vehicle title loans are banned outright in 33 states and Washington, D.C. 

Asset-based lending

Asset-based lending can be a legitimate form of lending. In mainstream lending, reputable lenders and financial institutions use measurable factors to assess a borrower’s ability to repay a debt. 

In the predatory version of asset-based lending, a lender pressures you to take on a secured loan without any regard for your ability to repay the debt. The lender has three ways of profiting from this loan: 

• Take the asset if you default when the monthly payments are unaffordable

• Generate high profits through excessive fees and interest, even if the borrower struggles to repay

• Encourage you to take out new loans with more fees to pay off existing ones

Asset-based lending is legal in all states but specific regulations on rates and loan terms vary. 

Predatory lending practices

Predatory lending often depends on dishonest lending practices and unfair terms. These include:

• Loan flipping. This involves repeatedly convincing you to refinance debt, often with high fees or into loans with less favorable terms. You end up borrowing multiple times, with your debt balance increasing with each renewal. 

• Packing. Lenders add unnecessary fees at each step of the borrowing process, such as forcing you to buy credit insurance you don't need. 

• Hidden balloon payments. You're offered a seemingly affordable loan but end up having to pay a large lump sum payment after a short time. 

Certain types of predatory lending are illegal. It's important to understand your rights if you have been the victim of criminal activity by a dishonest lender.