What Are Abusive Lending Practices?
Added: September 29, 2006
What are abusive lending practices? There are many examples of abusive lending practices in our society, and all have different solutions and answers. Of course one of the most common examples of abusive lending practices are those associated with making money from poor people, in what many people believe are unethical and abusive lending practices associated with bad credit. The fact is, someone who has bad credit may have simply had bad luck. They coiled have become sick without adequate medical insurance and run up very large hospital bills. They could have been in an accident with an uninsured motorist. But many people who have bad credit simply make bad choices. Many of them have never been educated in simple economics or learned how to create and balance a budget, or how to keep a checkbook accurately. In fact many people with bad credit are unable to open checking accounts because they have a bad record with accurately writing checks. If your checks continually bounce then the bank tends to not want to do checking account business with you. There is a big market in money orders purchased to be used by people who do not have checking accounts, usually purchased from the local convenience store.
Abusive lending practices often target these people because they tend to know less about the law and how to defend themselves from predatory lenders. Many times people with bad credit will try to restore their credit by going to a company that offers a credit card in a manner than many consider to be abusive lending. One example is a credit card bearing one of the popular and common logos with a two hundred dollar credit limit. This card is designed to help people with bad credit start the credit restoration process. However, the person with the card isn’t properly trained in how to use credit cards and quickly runs up the balance to the full two hundred and even a few dollars over. The credit card company has already charged a seventy dollar application fee which they have applied to the card, and a twenty five dollar yearly maintenance fee which they have applied to the card, so the card already has ninety five dollars charged against it when the card holder receives it. Then the card holder charges one hundred and ten dollars against it, going five dollars over the credit limit. This causes an immediate one hundred dollar fee, also charged against the card, for being over the credit limit. Suddenly the card holder owes over three hundred dollars on this card and has only used one hundred and ten dollars in value. When he can’t make the minimum payment the next month they continue to charge interest as well as a fifty dollar late fee. This happens month after month until the amount owed is very large indeed. This is considered an abusive lending practice.
Another common abusive lending practice in the minds of some are payday loan companies. The way a payday loan company works is someone will go in and ask to borrow one hundred dollars. They receive cash. They write a check to the payday loan company dated for two weeks from the date, and make out the check for one hundred and twenty dollars, a fee of twenty percent for two weeks. If the person doesn’t have enough money in the bank to cash the check in two weeks they can come in and pay a twenty dollar fee to extend the loan for another two weeks. This can go on forever with the poor lender paying almost five hundred percent interest a year. Most people call this an abusive lending practice.
Another potential abusive lending practice that is a close cousin to payday loan companies are car title loan companies that make a similar arrangement for a larger amount of money holding a car title as collateral. If the large amount of interest and the principle are not paid then the lender looses his car. Also pawnshops generally charge about ten percent per month for loans, keeping the items used as collateral if the loans are not repaid on time.
There are, of course, those who defend the companies mentioned and say that they really are not practicing abusive lending practices, but instead are responding to a need in society for quick cash for certain people who fall under the radar and are not able to use traditional loan companies or banks. Some members of the government believe that there is a point to this argument but wish to regulate the amount of fees and interest that can be charged. Of course the companies say that they have large default rates with their clients and therefore need the larger fees in order to make a profit and stay in business. The argument is then that they are engaged in abusive lending practices. Most people upon examining the situation see that both sides make very valid points.
Another potential abusive lending practice that most people don’t even think of are the banks themselves. Many banks now automatically offer anyone who has a checking account an automatic overdraft protection plan and encourage them to use it. In essence if a person has five dollars in the bank and writes a check for ten dollars the bank will loan them the money needed to allow the check to clear and charge their account a fee, often as high as twenty dollars, to clear the check and loan the money. These rates are so high that many people, including those in the auto title loan and payday loan business accuse the banks of abusive loan practices and of wanting to engage in a monopoly in such practices by driving them out of business. Some economic experts who have examined the situation say they may have a point.
Regardless, abusive lending practices are a danger to society because they tend to make poor people poorer, and in the words of many economic experts they tend to create a permanent economic underclass that will never get ahead. This leads to a smaller middle class and larger lower classes and upper classes, causing a danger to the culture and economic health of any nation.