Predatory Lending....What is it?
The U.S. General Accounting Office considers predatory lending anything that causes consumer welfare loss due to (1) too many fees, (2) interest rates that are too high, (3) single-premium credit insurance, (4) lending without regard to the borrower's ability to pay, (5) loan flipping, (6) fraud and deception, which includes not disclosing all of the loan term and conditions, (7) prepayment penalties, and (8) balloon payments.
Bond and Musto in "Predatory Lending In a Rational World," define predatory lending as a situation where "the lender knowingly extracts more surplus from the borrower than the loan delivers to the borrower." In other words, the lenders aren't telling you everything.
Predatory lenders often go after vulnerable borrowers. For example, people who need money, people who otherwise might not be able to take out a loan, people with poor credit, etc. Here are some things to keep in mind if you are looking to borrow money:
1. Are you being pressured to borrow more than you originally planned?
Predatory lenders want you to borrow big amounts. Why? Because it means a bigger commission check. If you feel that the lender is trying to have you borrow more than you need, this could be a sign of predatory lending.
2. From the point of view of a predatory lender - are you a vulnerable client?
Sadly, predatory lenders often target weak and vulnerable borrowers. For example, people with poor credit, significant debt, the elderly, and minority families, are often targets.
3. The lender wants you to sign a blank document...
NEVER put your signature on a blank document! RUN!
4. Higher than normal interest rates and short-term loans.
They may seem appealing, but if it takes you longer than a few months to pay off a loan with super high interest this could be dan-ger-ous. High interest doesn't seem so bad in the short term. After all, what's $50 on a $300 loan? But, if you take out a $300 loan and it takes you one year to repay, you'd pay over $1,000 (on a loan with 435% effective APR).
5. Are you being given full disclosure on the terms and conditions?
If you feel that the lender isn't telling you everything, that's a definite RED FLAG. You should have full disclosure on all loan terms and conditions, including any fees or prepayment penalties, before you sign anything.
6. Do you feel cornered into making a decision?
If so, just walk away. It will be much harder to fix the situation after you're committed. Do you feel like the process is too easy? In this type of situation, go with your gut and walk away.
Hope this helps you steer clear of predatory lenders!
Now, I'd love to hear from you!
Have you ever had a situation that involved a predatory lender? What did you do? How did you handle the situation? Let us know in the comments! Your experience might help someone who's in a similar situation!