Because Predatory Lending is not a legal term, its definition covers several different types of lending abuses, including loan consolidation , payday loans, high interest credit cards and standard lending - any type of lending that is able to convince a borrower to take out an unreasonably high rate in order to get the financial assistance they need right away.
Predatory lenders often target individuals that fit into specific, high-risk debt groups, such as ethnic minorities, individuals of low socio-economic status or education, and the elderly. Research on members of these groups have shown that they have a more difficult time with credit, and thus are more susceptible to needing credit right away without taking the time to fully research their choices.
The worst types of predatory lending attempt to link these high interest loans with some sort of collateral, such as a home or an automobile. Because the interest rates are so high, it is difficult for individuals to pay back the loans and the lender is able to repossess the individual's house or belongings and sell them at auction, resulting in significantly more profit for the lending companies.
All types of abusive or unfair loan practices are considered predatory practices, and as such they all have their non-predatory equivalents. Because of this it can be very difficult to tell the difference between a predatory lender and a non-predatory lender.
However, there are several key warning signs that one should be aware of before embarking on their loan search:
1) Fees - lenders make money off interest. They do not need a great deal of fees in order to cover the loan. Even some legitimate companies have some small fees, but a great deal of fees should put up a red flag.
2) Higher interest or a higher percentage of money taken out than is easily explainable, especially if the individual has a good to moderate credit rating.
3) Aggressive marketing practices - if they look as though they are trying to get you to sign for the money right away that should put up at least a warning sign. All companies want your money, even the legitimate ones, but an aggressive approach could be an indicator that further research is needed on the company.
4) Failure to disclose anything - there are many laws that require lending companies to disclose the rate information. If it appears they are hiding anything from you, this may not be a legitimate company and you should consider walking out immediately.
5) Risk-based loan pricing - If a lending company tries to tell you that you are a high risk borrower as a justification for high interest fees, check your credit score before taking these loans. If your credit score is low, they may be correct, but if your credit score is average to high, then you are not high risk and this company is attempting to scam you into paying a higher rate.
Avoiding predatory lenders is vital to keeping your credit payments low and your credit score high. Predatory lenders are designed to take advantage of you, so knowing the tricks to spot these lenders and avoiding them can be the difference between paying back a loan easily and possibly losing your home due to a high interest rate loan with collateral.