What is Predatory Lending?
Predatory lending is defined as any lending by banks, payday loan companies, title loan companies, and others that prey mostly on the naive, gullible, uneducated, poor, but they also prey on whomever they can prey on, particularly those with bad credit or no credit. Usually, predatory lenders take advantage of the poor and the desperate because those who are not financially strapped do not have to turn to a predatory lender for money.
Here are some examples of predatory lending:
(1) Payday lenders who charge their customers as much as 1500% interest and routinely call regular customers and encourage them to take out another payday loan
(2) Title loan companies who behave in much the same manner as payday lenders, charging an exhorbitant amount of interest, if allowed by state law.
(3) The large, internationally known banks, as well as small, regional banks who charge huge overdraft fees to customers who keep only small balances in their checking accounts and encourage them to bounce checks so they can collect overdraft fees
(4) Mortgage lenders who jack up the interest rate on sub-prime borrowers by as much as 8% (this was one of the reasons for the housing market collapse and recession of 2008). Not only can subprime borrowers not afford their monthly payments, but they purchased houses the couldn't afford.
(5) Rent-to-own establishments often charge people enormous sums for cheap, used furniture and poorly manufactured electronics. People are paying thousands more than they should for items they could buy at a discount retailer for significantly less, and all because the rent-to-own store offers them low monthly payments and their customers can't get credit anywhere else.
How Do You Know If a Lender Is Predatory?
The biggest indication that a lender is a predatory one can be found in their advertising. The phrases: "100 percent are approved" and "no credit check required" and "you are preapproved" should warn you that these lenders will make it easy for you to sign up for whatever they are selling, offer you low monthly payments, but in the long term, you will not be able to afford the purchase, you will pay an exhorbitant amount for whatever you are receiving, and they will make it hard for you to sever your relationship with them by refusing to accept partial payments. What predatory lenders don't tell you upfront is that they will refuse to accept your payment unless it is a lump sum payment in order to keep you in debt and any agreement you sign with them will contain an arbitration clause that is very prejudicial towards the customer, wherein the predatory lender will be awarded generous damages by the arbitration board if the debt goes to collection.
We Can't Blame It All on Predatory Lenders
Predatory lending is terrible. It is abusive and there should definitely be laws regulating it. Many states have banned payday loans, title loans or they heavily regulate them, putting a cap on the amount of interest they charge. But these types of lenders hire lobbyists who go state-to-state bribing elected officials to undo legislation or give them a pass on violating regulations. And the public seems to want access to these types of lenders. It seems that too many members of the public refuse to live within their means, reduce their expenses, and instead, spend foolishly and rely on predatory lenders to get through life.
The statistics on payday and title loans are shocking. The average American who takes out payday loans will take out as many as ten loans per year and be charged an average of $800 per loan. Many consumers will take out multiple loans at different payday loan establishments. The payday loan industry makes more than $8 billion every year off of the poor.
And when a state bans payday loans, the number of bankruptcies and banking overdraft fees in that state go up sharply. It seems that if people are prevented from taking out payday loans and title loans, they will scramble to find other means of living beyond their means.
How to Stop Relying on Predatory Lenders
Since predatory lenders like to go after those with poor credit or no credit, one of the best things you can do to avoid them is to establish a credit rating or improve your credit rating. People with good credit ratings have many more choices than those who don't.
Secondly, it is important to develop a budget and stick to it. Learning to say no to your desire to buy things you can't afford is also critical.
