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In the strictest and legal sense of the word predatory lending refers to secured loans such as home or car loans which are made by the lender with the intention that the borrower can't really pay them which would allow the lender to sieze the car or home and sell it for a profit. The word has been expanded to refer to the practice of convincing borrowers to agree to unfair and abusive loan terms. This could be done either through outright deception or through aggressive sales tactics, taking advantage of borrowers' lack of understanding of extremely complicated transactions. Predatory loans, for instance, for the purchase of a home, could lead to foreclosure. Opponents of predatory lending often include transactions such as tax refund anticipation loans (or RALs), pay day loans, and credit cards, along with mortgage lending, in the term. The terminolgy is thus "loaded", where proponents and opponents often intentionally blur the line between the two definitions in order to make their case sound better.
The first definition (Purposely forclosing to make a profit)
This genre of predatory lending is very diffucult to do profitably. It is illegal as well, but there is always a question of the intentions of both the lender and the customer. Most consumer finance and banking companies don't even have the appearance of performing this genre of predatory lending, as they often lend at high loan to value ratios which would make it impossible to profit in this way. There are other, usually smaller consumer finance companies which advertise that they do not care about income if the amount of the loan is low relative to the value of the equity in the asset. These forms of loans can cause suspicion, although they are popular with those who do not have visible sources of income, such as those who are paid in cash.
The wider definition (abusive or unfair lending)
There are many lending practices which have been called abusive and labeled with the term "predatory lending"
- single premium credit insurance (this is a purchasing of insurance which will pay off the loan in case you die, this is more expensive than other forms of insurance because it does not involve any medical checkups, but customers almost always aren't shown their choices (becuase usually the lender is not licensed to sell other forms of insurance). In addition, this insurance is usually financed into the loan which causes the loan to be more expensive, but at the same time encourages people to buy the insurance because they do not have to pay up front)
- any situation where the loan price is negotiable, but the buyer is not aware (usually because in most places loan prices are set by credit score and aren't negotioable). This causes the borrower to trust that the lender is trying to get him the lowest rate when in fact he is trying to get him the highest rate. This scenario occours in dealer auto finance and consumer finance. This conflict of interest leads to many cases of lender employees doing misleading tactics as the process is not controlled.
- The most common complaint however, is with any loan which has associated fees which do not add to the APR number. These are compared to a hypothetical situation where the same money can be borrowed without fee from a line of credit. For example, a payday loan of 20 dollars may cost 2 dollars. If the borrower only had a credit card, a cash advance on the credit card might cost 4 dollars, and the payday loan would be the cheapest option (unless what I needed to purchase could be purchased by the credit card incurring no cash advance fee). However, if the borrower had a line of credit with no fees for cash advances, then if he borrowed that 20 dollars and repayed it within the same time frame as the payday loan, the interest would only cost 0.02 cents. This causes people to suggest that the 2 dollars charged on the 20 dollars is a 1000% interest rate. However it might be impossible for the borrower to obtain a no fee line of credit. This scenario occours in many places:
- Payday loans
- Credit Card late fees
- Checking Account Overdraft Fees
- Car Dealer Finance, where the price of the car if financed is higher than if payed for in cash
- Tax Refund Anticipation Loans
- Certain mortgage and equity loan fees
- Rent to own stores
Anti–predatory-lending organizations such as ACORN argue that predatory loans are usually made in poor and minority neighborhoods where better loans are not readily available, and that the loss of equity and foreclosure can devastate already fragile communities.
Some critics have charged Wells Fargo, specifically its consumer finance division, with being a predatory lender.
Organizations such as AARP and ACORN have worked to stop what they describe as predatory lending. ACORN in particular has targeted specific companies such as Household Finance and H&R Block, successfully forcing them to change their practices. These groups have also spearheaded legislation that would make forms of lending deemed to be predatory illegal.
See Also
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