What Is Predatory Lending?

Predatory lending typically means imposing unfair, deceptive, or abusive loan terms on borrowers. In many cases, these loans carry high fees and 澳洲幸运5官方开奖结果体彩网:interest rates, strip the borrower of equity, or place a 澳洲幸运5官方开奖结果体彩网:creditworthy borrower in a lower credit-rated (and more expensive) loan, all to the lender's෴ benefit.

Predatory lenders often use aggressive sales tactics and exploit borrowers’ lack of understanding of financial transactions. Through deceptive or fraudulent actions and a lack of transparency, they entice, induce, and assist borrowers in 澳洲幸运5官方开奖结果体彩网:taking out loans they cannot reasonably repay.

How Predatory Lending Works

Predatory lending includes any unscrupulous practices carried out by lenders to persuade borrowers to 澳洲幸运5官方开奖结果体彩网:take out loans they cannot pay back or must pay back at a cost that is significantly above the 澳洲幸运5官方开奖结果体彩网:market rate. Predatory lenders take advantage of borrowers' circumstances or lack of knowledge.

A 澳洲幸运5官方开奖结果体彩网:loan shark, for instance, is the archetypal example of a predatory lender—someone who loans money at an extremely high 澳洲幸运5官方开奖结果体彩网:interest rate and may even threaten violence to collect on their debts. However, predatory lending also occurs due to more established institutions like banks, finance companies, 澳洲幸运5官方开奖结果体彩网:credit unions, mortgage brokers, 🐼෴attorneys, or real estate contractors.

Predatory lending puts many borrowers at risk, but it primarily targets those with few credit options or who are vulnerable in other ways—people whose inadequate income leads to regular and urgent needs for cash to make ends meet, those with low credit scores, those with less access to education, or those subject to discriminatory lending practices because𝕴 of their race, ethnicity, age, or disability.

Predatory lenders often target communities with 澳洲幸运5官方开奖结果体彩网:few other credit options exist, making it more difficul🤡t for borrowers to shop around. They lure customers with aggressive sales tactics by mail, phone, TV, radio, and even door-to-door and generally use a variety ofﷺ unfair and deceptive tactics to profit.

Predatory Lending Tactics To Watch Out For

Predatory lending is designed, above all, to benefit the lender. It ignores or hinders the borrower’s ability to repay a debt. The deceptive lending tactics attempt to exploit a borrower’s lack of understanding of financial terms and the rules surrounding loans. These tactics can include those identified by the 澳洲幸运5官方开奖结果体彩网:Federal Deposit Insurance Cℱorporation (FDIC), along with several others:

• Excessive and abusive fees: These are often disguised or downplayed because they are not included in a loan's interest rate. Excessive 澳洲幸运5官方开奖结果体彩网:prepayment penalties are another example.
• Balloon payment: This is one substantial payment at the end of a loan's term, often used by predatory lenders to make your monthly payment look low. The problem is you may not be able to afford the 澳洲幸运5官方开奖结果体彩网:balloon payment and will have to refinance, incur new costs, or default.
• Loan flipping: The lender pressures a borrower to 澳洲幸运5官方开奖结果体彩网:refinance repeatedly, generating fees and points for the lender each time, trapping the borrower in an escalating debt burden.
• Asset-based lending and equity stripping: The 澳洲幸运5官方开奖结果体彩网:lender grants a loan based on your asset, say a home or a car, rather than on your ability to repay the loan. You risk losing your home or car when you fall behind on payments. Equity-rich, cash-poor older adults on fixed incomes may be targeted with loans (say, for a house repair) that they will have difficulty repaying, and that will jeopardize their equity in their home.
• Unnecessary add-on products or services, such as 澳洲幸运5官方开奖结果体彩网:single-premium life insurance for a mortgage.
• Steering: Lenders steer borrowers into expensive subprime loans, even when their 澳洲幸运5官方开奖结果体彩网:credit history and other factors qualify them for prime loans.
• Reverse redlining: 澳洲幸运5官方开奖结果体彩网:Redlining, the racist housing policy that effectively blocked Black families from getting 澳洲幸运5官方开奖结果体彩网:mortgages, was outlawed by the Fair Housing Act of 1968. But redlined neighborhoods are still largely inhabited by Black and Latino/Latina communities. And in a kind of reverse redlining, they are often targeted by predatory and subprime lenders.

Subprime Mortgages

Classic predatory lending centers around 澳洲幸运5官方开奖结果体彩网:home mortgages. Because home loans are backed by a borrower’s real property, a predatory lender can pr💜ofit from the loan terms stacked in their favor and the sale of a foreclosed home if a borrower defaults.

Subprime loans aren’t automatically predatory. Their higher interest rates, banks would argue, reflect the cost of riskier lending to 澳洲幸运5官方开奖结果体彩网:consumers with flawed credit. However, even without deceptive practices, a borrower of a subprime loan faces risks due to their financial burden. With the explosive growth of subprime loans came the potential for predatory lending. 

When the housing market crashed and a foreclosure crisis precipitated the 澳洲幸运5官方开奖结果体彩网:Great Recession, homeowners with subprime mortgages became vulnerable. Subprime loans came to represent a disproportionate percentage of residential foreclosures. Black and Latino/Latina homeowners we✨re particularly affected.

Predatory Lenders

澳洲幸运5官方开奖结果体彩网:Predatory mortgage lenders had targeted them aggressively in predominantly minority neighborhoods, regardless of their income or creditworthiness. Even after controlling for credit score and other risk factors like 澳洲幸运5官方开奖结果体彩网:loan-to-value (LTV) ratios, subordinate liens, and 澳洲幸运5官方开奖结果体彩网:debt-to-income (DTI) ratios, data shows that Black and Latino/Latina borrowers were more likely to receive subpriﷺme loans at higher costs.

Women, too, were targeted during the housing boom that crashed spectacularly in 2008, regardless of their income or credit rating. Black women with the highest incomes were five times more likely than White men of similar incomes to receive subprime loans.

Settlements

In 2012, Wells Fargo reached a $175 billion settlement with the Justice Department to compensate Black and Latino/Latina borrowers who qualified for loans and were charged higher fees or rates or improperly steered into subprime loans.

Other banks also paid settlements. But the damage to families of color is lasting. Homeowners not only lost their homes but the chance to recover their investment when housing prices also climbed back up, contributing yet again to the racial wealth gap.

In October 2021, the Federal Reserve revealed that the average Black and Hispanic or Latino/Latina households earn about half as much as the average White household and own only about 15% to 20% as much net wealth.

Other Common Types of Predatory Loans

Payday Loans

The 澳洲幸运5官方开奖结果体彩网:payday loan industry lends billions of dollars annually in small-dollar, high-cost loans as a bridge to the next payday. These loans typically are for two weeks, with 澳洲幸运5官方开奖结果体彩网:annual percentage rates (APR) ranging from 390% to 780%. Payday lenders operate online and through storefronts largely in financially underserved—and disproportionately Black and Latino/Latina—neighborhoods.

Although the federal 澳洲幸运5官方开奖结果体彩网:Truth in Lending Act (TILA) requires payday lenders to disclose their finance charges, many people overlook the costs. Most loans are for 30 days or less and help borrowers to meet short-term liabilities. Loan amounts on these loans usually range from $100 to $1,000, with $500 being common. The loans usually can be rolled over for additional finance charges, and many borrowers—as high as 80%—end up as repeat customers.

With new fees added each time a 澳洲幸运5官方开奖结果体彩网:payday loan is refinanced, the debt can easily spiral out of control. A 2019 study found that using payday loans doubles the rate of personal 澳洲幸运5官方开奖结果体彩网:bankruptcy. A number of court cases have been filed against payday lenders, as lending laws have been enact💜ed since the 2008 financi🦩al crisis to create a more transparent and fair lending market for consumers. However, research suggests that the market for 澳洲幸运5官方开奖结果体彩网:payday loans has only ex𒐪panded since 2008 and that it enjoꩵyed a boom during the 2020–2022 COVID-19 pandemic.

Auto-Title Loans

These are single-payment loans based on a percentage of your car's value. They carry high interest rates and require handing over the vehicle's title and a spare set of keys as 澳洲幸运5官方开奖结果体彩网:collateral. For roughly one in five borrowers who have their vehicle seized, because they're unable to repay the loan, it's not just a financial loss but can also threaten a family's jobs and childcare.

New Forms of Predatory Lending

New schemes are popping up in the so-called 澳洲幸运5官方开奖结果体彩网:gig economy. For instance, Uber, the ride-sharing service, agreed to a $20 million settlement with the 澳洲幸运5官方开奖结果体彩网:Federal Trade Commission (FTC) in 2017, in part for 澳洲幸运5官方开奖结果体彩网:auto loans with questionable credit terms that the platform extended to its drivers.

Elsewhere, some fintech firms offer products called "澳洲幸运5官方开奖结果体彩网:buy now, pay later." These products are not always transparent about fees aไnd interest rates and may entice consumers to fall into a debt spiral they cannot escape.

Is Anything Being Done About Predatory Lending?

Many states have 澳洲幸运5官方开奖结果体彩网:anti-predatory lending laws to protect consumers. Some states have outlawed payday lending altogether, while others have put caps on the amount lenders can charge.

The 澳洲幸运5官方开奖结🙈果体彩网:U.S. Department of Housing and Urban Development (HUD) and the 澳洲幸运5🃏官方开奖结果体彩网:Consumer Financial Protection Bureau (CFPB) have also taken measures to c💝ombat predatory lending. However, as the shifting stance o🧔f the latter agency shows, rules and protections are subject to change.

In June 2016, the CFPB issued a rule establishing stricter regulations for underwriting payday and auto-title loans. Then, under new leadership in July 2020, the CFPB revoked that rule and delayed other actions, considerably weakening federal consumer protections against these predatory lenders.

How To Avoid Predatory Lending

• Educate yourself. Improving your financial literacy can help you spot 澳洲幸运5官方开奖结果体彩网:red flags and avoid questionable lenders. The FDIC provides tips on protecting yourself when taking out a mortgage, like canceling 澳洲幸运5官方开奖结果体彩网:private mortgage insurance (PMI), which you must pay if your down payment is less than 20% of the property value. HUD also advises on 澳洲幸运5官方开奖结果体彩网:mortgages, and the CFPB offers guidance on payday loans.
• Shop around for your loan before you sign on the dotted line. You may feel hesitant to apply for a loan if you've experienced lending discrimination. Compare offers to determine what you can get approved for and find a lender that focuses on your needs.
• Consider alternatives. Before taking out a costly 澳洲幸运5官方开奖结果体彩网:payday loan, consider other sources like public assistance programs, family and friends, or religious organizations to reduce the likelihood of financial harm.

The Bottom Line

Predatory lending imposes unfair and abusive 澳洲幸运5官方开奖结果体彩网:loan terms on borrowers, including high interest rates, high fees, and te🎀rms that strip the borrower of equity. Predatory lenders tend to target vulnerable populations, using aggressive༒ sales tactics and deception to coax borrowers into loans they can't afford.

Predatory lenders are not all loan sharks since established institutions have also engaged in predatory lending. The subprime mortgage boom in the years leading up to 2008 was, arguably, an example of predatory lending. You can avoid predatory loans by educating yourself through research to ensure you understand any loan documents and how much you'll owe.