Predatory lending is when a financial institution takes unfair advantage of a customer by charging extremely high-interest rates and fees. There are many forms of predatory lending and it is very important to understand what they are so you are able to protect yourself and your finances.
Types of Short Term Predatory Lending
Payday lending loans or cash advance loans are one of the most common forms of predatory lending. Borrowers only need to show that they have identification, a checking account, and some type of income. The lender then accepts a post-dated check as collateral for a short-term loan. These can have very high-interest rates.
Car title loans are similar to payday loans but use your vehicle as collateral. These also have extremely high-interest rates and usually require repayment within one month. These loans are usually for much less than the car is worth. They are very risky because if you aren’t able to pay back the loan then they could take possession of your car.
Overdraft loans are offered by banks to their customers. If you overdraft your bank account, then the bank typically charges a fee anywhere from $20 to $35 for each transaction no matter what the amount may be. Some banks also charge a daily fee until the account has a positive balance once again. Check with your bank to see if they support this type of predatory lending and ask if there are any alternatives should you overdraft your account.
Tax refund anticipation loans are a popular form of predatory lending during tax season. They are cash advances against your anticipated tax refund. These can have extremely high-interest rates between 40% and 700% APR.
Long Term Predatory Lending
Predatory mortgage lending is the most common and potentially the most damaging of predatory lending practices. It is estimated that predatory mortgage lending costs people over $9 billion every year. Many homes end up being foreclosed on because this practice can drain money from the family.
This form of predatory lending abuses several different aspects of lending including:
- Abusive prepayment penalties if you try to pay off the loan early
- Excessive fees are hidden within the financing
- Forced arbitration prohibits buyers from taking the lender to court if they find that they are being taken advantage of
- Kickbacks to brokers to encourage them to get people into these types of mortgages
- Loan flipping to charge the customer more fees by refinancing
- Steering and targeting that steers borrowers towards mortgages with higher rates and premiums when the borrower would have qualified for a loan with better terms
- Unnecessary products such as unneeded insurance
It is important to familiarize yourself with these forms of predatory lending so that you are able to avoid them if possible.