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What Is Predatory Lending?

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What Is Predatory Lending?

Predatory lending occurs when a business takes advantage of you by charging higher-than-normal interest rates, unreasonable fees, and certain other charges on loans that you take out. It is a form of high-cost borrowing. Predatory lending can occur on many different kinds of loans and financial products, including mortgage, car, payday, tax refund, car title, and home equity loans; and credit cards and debit cards. It also includes:

  • Pawnshops. Many pawnshops make loans for which you put up an item of your own as collateral. If you can’t finish making payments, the shop can keep your item.
  • Rent-to-own stores. These stores will rent an item (furniture or a TV, for example) for a series of rental payments that vastly exceed the actual price of the item.
  • Payday loans. These are small loans that must be paid back on your next payday along with a fee. You write a check beforehand to pay back the loan.
  • Tax refund loans. These are loans for which you offer your tax refund as payment.
  • Car title loans. These are payday loans for which you put up collateral, such as a car. If you default on your loan, the lender repossesses the item.
  • Credit cards. Some credit cards come with very high fees and restrictions and are marketed to those with bad credit or no credit.
  • Debit cards. Some of these cards come with high fees for many different things.
  • Bank accounts. Some bank accounts charge many different fees for many things.
  • Check-cashing shops. Many check-cashing shops offer payday loans.
  • Mortgages. Some home mortgage loans come with deceptive, unfair, hidden, or even fraudulent lending practices.

A very expensive problem

Predatory lending costs Americans tens of billions of dollars in fees, interest, and penalties each year. The yearly interest rates alone can exceed 500%—far higher than a typical credit card charges. There are numerous state and federal laws designed to curb predatory lending. However, some lenders still find ways around these laws.

We will focus on payday lending in this tutorial.