With the moratoriums on evictions and foreclosures expiring at the end of the month, predatory lending practices will sadly likely be more prevalent this summer. Given that, we’ve decided to take a pause on our retirement series and revisit our predatory lending series.
Over the next few weeks, we’ll discuss predatory lending, what it is, who they target, some of the predatory lending practices, and what alternatives exist.
First, what is predatory lending? This is a little more complicated than you’d think, primarily because there isn’t one definition agreed upon by federal laws, states, and regulatory agencies. However, there are a number of characteristics that are common among predatory lenders. One is excessive cost. Predatory lenders often charge interest rates and fees that far exceed reasonable compensation for the lender’s costs or risks. Another is a lack of underwriting, meaning the lender makes little to no effort to ensure the borrower has the credit, income, and assets needed to reliably repay the loan. Predatory lenders also rarely report their borrowers credit information to the credit bureau when they’re paying their debts on time and as asked, preventing borrowers from improving their credit through positive payment history. Instead, the only times these predatory lending products are typically reported to the credit bureaus is after the borrower defaults and their debt is in collections. Lastly, many predatory lenders provide products that are designed to keep borrowers on a “debt treadmill.” This is often done through creating excessively high cost, and short term loans that borrowers won’t be able to repay at maturity, forcing them to roll over or renew multiple times, adding more fees each time.
Who do predatory lenders typically target? Traditionally, low-income working consumers, especially those with little to no savings that live paycheck to paycheck, are the primary targets for predatory lenders, as evidenced by the clustering of predatory lending institutions in low-income communities. Young adults who don’t have established credit, much in savings, and little experience financially are also often targets. Many elderly consumers with limited resources, as well as young members of the military are frequent targets too. Lastly, predatory lenders tend to target borrowers that, whether it’s a lack of income, lack of credit, or poor credit, may not have access to other, less predatory financing options. Predatory lending is often a trap that presents a serious threat to low-income families, wreaking havoc on their finances.
Over the next few weeks, we’ll discuss various predatory lending practices, including payday loans, car title loans, refund anticipation checks and loans, overdraft loans, and rent-to-own contracts.