What is predatory lending

What is Predatory Lending? Common Predatory Lending Practices Equity Stripping The lender makes a loan based upon the equity in your home, whether or not you can make the payments. If you cannot make payments, you could lose your home through foreclosure. Bait-and-switch schemes The lender may promise one type of loan or interest rate but without good reason, give you a different one. Sometimes a higher and unaffordable interest rate doesn't kick in until months after you have begun to pay on your loan.

Therefore, this compensation may impact how, where and in what order products appear within listing categories. Other factors, such as our own proprietary website rules and whether a product is offered in your area or at your self-selected credit score range can also impact how and where products appear on this site. While we strive to provide a wide range offers, Bankrate does not include information about every financial or credit product or service.

This content is powered by HomeInsurance. All insurance products are governed by the terms in the applicable insurance policy, and all related decisions such as approval for coverage, premiums, commissions and fees and policy obligations are the sole responsibility of the underwriting insurer.

The information on this site does not modify any insurance policy terms in any way. Predatory lending tactics may involve loans with high interest rates, hidden and excessive fees, undisclosed terms and more. Predatory lenders typically target vulnerable borrowers and trap them in cycles of debt that can lead to foreclosure and even bankruptcy. There are plenty of steps you can take to detect and avoid predatory lending.

The first step is identifying red flags that may arise during the homebuying process. Before you apply for a mortgage, you should research current mortgage interest rates. This gives you a good sense of what you can expect. If your credit is fair, you may be quoted something below average.

If it needs improvement, you may get quoted a slightly higher rate. Andrew Pizor, an attorney with the National Consumer Law Center, recommends that homebuyers shop around for the best rates and closely examine the loan estimate from at least three different lenders. This three-page document shows the estimated interest rate, monthly payment and total closing costs of a loan. He also suggests that consumers pay close attention to the annual percentage rate, or APR.

Moreover, Pizor advises consumers to make sure mortgage points are being applied as agreed. Also called discount points, mortgage points are essentially fees that you pay the lender in exchange for a lower interest rate. Lenders that allow you to pay for mortgage points typically have charts which break down how much a point costs and by what amount that point would lower your rate.

The homebuying process involves plenty of expenses beyond your mortgage. These can include a variety of fees and closing costs. Here are some examples. Predatory lenders could also charge fees that serve no real purpose other than to make more money off consumers. Identify these fees and how they differ across lenders.

Comparing loan estimates can help you spot outliers. Predatory lenders may also offer loans with hidden fees. High fees and hidden fees can make it more difficult to compare the cost of a loan with high fees to a traditional loan. To help you accurately compare the costs of multiple loans, you can convert the fees to an APR. The high fees associated with some types of loans could make it more difficult for people to repay their loans on time.

For example, many consumers who take out payday loans roll over or refinance the original amount borrowed. In fact, according to the Consumer Financial Protection Bureau, more than four out of five payday loans are reborrowed within a month. According to the CFPB, many people end up paying more in fees than the original loan amount. But it could be a red flag indicating a lender that uses unfair and deceptive practices.

Your Money. Personal Finance. Your Practice. Popular Courses. Part Of. Elements of Inequality. Role of the Financial System. Legal Protections. Measuring Inequality. Theories Explaining Inequality. Models to Reduce Inequalilty. Personal Finance Loan Basics. What Is Predatory Lending?

Key Takeaways Predatory lending is any lending practice that imposes unfair and abusive loan terms on borrowers, including high interest rates, high fees, and terms that strip the borrower of equity. Predatory lenders often use aggressive sales tactics and deception to get borrowers to take out loans they can't afford. They typically target vulnerable populations, such as those struggling to meet monthly expenses; people who have recently lost their jobs; and those who are denied access to a wider range of credit options for illegal reasons, such as discrimination based on a lack of education or older age.

Predatory lending disproportionately affects women and African American and Latinx communities. Article Sources. Investopedia requires writers to use primary sources to support their work. These include white papers, government data, original reporting, and interviews with industry experts. We also reference original research from other reputable publishers where appropriate. You can learn more about the standards we follow in producing accurate, unbiased content in our editorial policy.

Compare Accounts. The offers that appear in this table are from partnerships from which Investopedia receives compensation. This compensation may impact how and where listings appear. Investopedia does not include all offers available in the marketplace. An unlawful loan is a loan that fails to comply with lending laws, such as loans with illegally high interest rates or those that exceed size limits.

What Is the National Housing Act? What Does Usury Rate Mean? The term usury rate refers to a rate of interest that is considered to be excessive as compared to prevailing market interest rates. Usury Definition Usury is the act of lending money at an interest rate that is considered unreasonably high or that is higher than the rate permitted by law.