Predatory lending

The term "predatory lending" has no universally accepted meaning. In the broadest sense of the term, it refers to unconscionable lending practices that take advantage of vulnerable borrowers, such as the elderly or unsophisticated. Few would probably disagree with this definition in the abstract, although there is a great deal of disagreement about which lending practices are "unconscionable."

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Colloquially, the term has been expanded to refer to the practice of convincing borrowers to agree to unfair and abusive loan terms. Such loans could take place either through outright deception or through aggressive sales tactics, taking advantage of borrowers' lack of understanding of extremely complicated transactions.

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One lending tactic that is generally considered to be "predatory" is making a secured loan, such as home or car loans, with the intention that the borrower will not repay the loan. In most instances, making a loan that is certain to go into default is not a profitable lending strategy. Even if the loan is secured, lenders are still likely to take a loss because foreclosure is an expensive process, and foreclosure sales generally yield returns well below the market value of the collateral. A lender can still turn a profit, however, if the debt is substantially over secured, meaning that the collateral is more valuable than the amount of the debt. Thus, some lenders target elderly homeowners who have considerable equity in their homes, and who might be more easily deceived or coerced into taking out a mortgage loan that they cannot afford to pay back. This is one of the most common lending tactics widely considered to be predatory. A lender might also originate a loan to a borrower that cannot be expected to repay it, and then immediately sell the loan to a secondary market investor for a profit. The investor, not the original lender, is ultimately saddled with the loss when the borrower defaults.

Related Topics:
Secured loan - Collateral - Equity

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