What Is Predatory Lending?
Predatory lending includes any unscrupulous actions carried out by a lender to entice, induce and assist a borrower in taking a loan that carries high fees, a high-interest rate, strips the borrower of equity, or places the borrower in a lower credit rated loan to the benefit of the lender. As with most things of a dishonest nature, new and different predatory lending schemes frequently arise.
Predatory Lending Explained
Many states have anti-predatory lending laws. A dedicated consumer who shops around for a mortgage is unlikely to be taken by predatory lending. Additionally, becoming more financially literate helps borrowers spot red flags and avoid questionable lenders. The U.S. Department of Housing and Urban Development (HUD) has also been taking measures to combat predatory lending.
Predatory Lending vs. Redlining
Predatory lending is different from redlining, which is an unethical practice that puts services (financial and otherwise) out of reach for residents of certain areas based on race or ethnicity. It can be seen in the systematic denial of mortgages, insurance, loans, and other financial services based on location (and that area's default history) rather than an individual's qualifications and creditworthiness. Notably, the policy of redlining is felt the most by residents of minority neighborhoods.
Predatory lending benefits the lender and ignores or hinders the borrower’s ability to repay a debt. These lending tactics often try to take advantage of a borrower’s lack of understanding concerning loans, terms, or financial literacy.
Classic predatory lending centers around home mortgages. Since home loans are backed by a borrower’s real property, a predatory lender can profit not only from loan terms stacked into their favor but also from the sale of a foreclosed home, if a borrower defaults.
New forms of predatory lending are popping up in the so-called "gig-economy." For instance, the ride-sharing service, Uber, has been accused of predatory lending for extending auto-financing to their platform's drivers — so they can purchase a car on questionable credit terms.