Pros And Cons Of Predatory Lending

Predatory lending usually occurs when financial institutions take unfair advantage of consumer’s financial needs by extending credit with terms that compensate them over and beyond the credit risk. Predatory lending comes in different forms, but always involve the consumer paying high interest rates and exorbitant fees. Some predatory lending practices include:

• Equity Stripping: The lender makes a loan based upon the equity in the debtor’s home. If the debtor cannot repay the loan, the home goes into foreclosure.

• Bait-and-switch schemes: The lender may promise one type of loan or interest rate but gets the borrower to agree to a different loan and higher interest rate.

• Loan Flipping: A lender refinances a loan with a new long-term, high cost loan. Each time the lender "flips" the existing loan, the borrower is required to pay points and assorted fees.

• Packing: A loan is made that contains charges for services the borrower did not request or need. "Packing" most often involves making the borrower believe that credit insurance must be purchased and financed into the loan in order to qualify.

• Hidden Balloon Payments: The borrower is approved for a low rate loan, but at closing may be informed that the low rate is short term, and the repayment amounts balloon afterwards.

• Payday Lending (sometimes called cash advance): The borrower uses a post-dated check or electronic checking account information as collateral for a short-term loan. Borrowers need only personal identification, a checking account, and income to qualify.

Overdraft Loans (also called "bounce protection" plans): In exchange for covering account overdrafts, banks charge returned check fees per transaction. Some banks also charge a per day fee until the cons...

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...ancial positions of the borrowers, their lack of knowledge as well as the superior bargaining power of the lender to get the borrowers to agree to these loans. The lenders should bear the major responsibility of these loans, as they are aware of the ramifications of such transactions. The borrowers are also responsible, as they should not enter into contracts without adequately understanding the consequences of such actions. In many cases, the lenders do not provide the information that would assist the borrower in making rational decisions. There are instances when the borrower does not care about the increased penalties, they just want to get their hands on the money, and worry about the consequences later. Some borrowers just live beyond their means but once they get sucked into a predatory loan, they begin a cycle of debt that they just cannot get out of.