What Is Predatory Lending?
Added: September 29, 2006
What Is Predatory Lending?
What is predatory lending? The term is thrown about in conversation in the public arena a lot lately. Politicians often discuss predatory lending and the average person may have no idea what the politicians are talking about, or what they mean.
To define the question “what is predatory lending” think first of the lending industry and how it makes money. Lending is profitable for businesses like banks, savings and loan companies, mortgage companies, credit unions, auto finance companies and other organizations because it is a way to put money to work making more money. The money earned by use of the money loaned is called interest. Sometimes these companies have additional charges or fees, such as loan origination fees. The amount of interest these companies are able to charge is usually regulated by government agencies. Local and state governments often have laws and ordinances that regulate lending and define predatory lending, but in the United States the government level that is most concerned with the lending industry and predatory lending in general is the federal government.
Usury is the practice of overcharging interest rates and making the cost of borrowing money exhorbinant. The reasons for the government regulating lending are two fold. First interest rates that are too high can discourage the borrowing of money, which slows down the circulation of money in the economy. This slowdown of the economy has a ripple effect, eventually contributing to inflation, higher prices and fewer jobs being created. Another problem with predatory lending, or lending with excessively high interest rates are the social problems associated with it. Predatory lending eventually leads to things like loan sharking, a common method by organized crime to take advantage of people who are in desperate financial situations by loaning them money at very high, accelerated interest rates, with interest charged on the interest. Loan sharking is also often associated with violence. Loan sharks will collect from people using fear, intimidation and physical force. Government agencies generally fear that predatory lending will eventually deteriorate into something like loan sharking.
What is predatory lending when government representatives discuss it in the news? Many times the government spokespeople are talking about credit cards that are issued to people who have less than perfect credit. There are many credit card companies that are honest and reliable, but there are a few predators in the group that prey on those with bad credit who are susceptible to offers of credit cards to repair their interest that offer much higher than normal rates, and very large fees added on as late charges if the payments are not made on time. One person involved in a credit card company that he believed was involved in predatory lending complained of received a well known credit card with a three hundred dollar credit limit, and finding when he went one dollar over that limit that he was hit with a fifty dollar over the limit fee. Then, the next month that fee was increased because he had made only the minimum payment on the card itself. Eventually his three hundred dollar credit card was sending him bills for over a thousand dollars.
Another common example of predatory lending are pawn shops. While pawn shops have been around for many years and some people believe they serve a useful purpose in society there are other people who believe that they are predatory lenders. A pawn shop will, for instance take an item they believe they can resell for an amount, lets say for one hundred dollars. They will loan the borrower fifty dollars and will keep the item as collateral. The pawn shop will charge ten percent interest per month on the loan, but with a ten dollar minimum which in the case of the fifty dollar loan means twenty percent. If the money is not repaid within a certain time period the item will be forfeited and sold by the pawn shop.
Another common type of business that is accused of predatory lending are payday loan companies. These companies will allow a person to write a post dated check for example, dated for two weeks from the present day. The lender will lend them one hundred dollars and they will write a check for one hundred and twenty dollars, twenty percent for a two week period. This interest rate amounts to forty percent per month, and four hundred and eight percent per year. Of course the owners of the payday loan companies in their defense do have a large percentage of defaults that they are unable to collect, and they do make the interest rates and fees information available to the lenders. However, many people believe that these companies are predatory lenders taking advantage of people in tight financial situations, and some also believe that those who use these companies tend to be from less education socio economic groups who are less likely to understand the short term and long term economic implications of this type of loan. In other words, these companies are doing business with people who are too desperate or too ignorant to know better .
Another type of business accused of predatory lending are auto title loan companies. Many times in many cities auto title loan companies, pawn shops and payday loan companies are all part of the same company. With an auto title loan company a person will keep their car and use it but will sign the title over to a loan company to hold, and receive a cash loan for a small amount of the value of the car, with payments due in thirty, sixty and ninety days. The interest rates on the loan will be very much like those of pawn shops or payday loan companies. If a person does not pay the car is repossessed and they loose it or have to buy it back.
Is predatory lending is only the first question to be asked. The next question of course is, what will society do to regulate predatory lending? That is an even better question.