Predatory Lending
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Introduction Predatory practices in businesses, particularly those that give credit, is the practice of taking advantage of less sophisticated borrowers, or borrowers desperate for funds, using the lender’s superior bargaining position to obtain credit terms that go well beyond the compensation of the risk involved. These practices take place generally in the subprime lending market, where borrowers have little to no credit history, poor credit history, bankruptcies, and/or low income. (p. 654)Examples The economic crisis of 2008 was fueled in part by predatory loans in the housing markets. An example of predatory lending in the housing market would be balloon loans. Balloon loans target customers with lower incomes. They generally have lower payments throughout the majority of the loan period, but require a large balloon payment at the end to satisfy the loan. Most borrowers are unable to prepare for the balloon payment, and the result is foreclosure. Another example of predatory practices is emphasizing the payment. Lenders use this tactic to distract the borrower from the details of the loan, speaking only about the affordable payment. There are many ways that a lender can manipulate a loan to make for an attractive payment, all the while setting up the borrower for financially devastating future consequences.
Although predatory mortgage lending was widely considered the root of the 2008 financial crisis, other short term predatory lending was, and still is occurring. These types of loans include title lending, tax refund anticipation loans, and payday lending. These predatory loans generally attract lower income borrows who are desperate for funds. They charge incredibly high interest rates, and put assets at risk that directly affect the wellbeing of the borrowers.Conclusion The predatory lenders in these instances are not all who is to blame for the financial crisis’s that follow in the wake of these practices. The borrowers themselves have the ability to choose, or to not choose which loans they agree to take. It is understandable that some borrowers have circumstances that they feel they can’t overcome without engaging in such practices, but as the old adage goes, “buyer beware.” Any individual willing to sign a contract without fully reading and understanding it bears some, if not all, of the responsibility of the outcome.Resources5 Examples of Predatory Lending. (n.d.). Retrieved January 19, 2015, from