Predatory Lending

Predatory lending falls under the category of lending that may be legal, but nonetheless takes advantage of consumers. Some lenders make loans to borrowers fully expecting a high percentage of borrowers to default at some point; and the lender can then take the borrower’s equity.

Cash-out refinancing deals may fall under this category; for example, a borrower that has fallen on hard times, but has a lot of equity and an existing low-interest mortgage, may be convinced to take out a loan in order to get much-needed cash. However, the repayment obligation will be substantial and at a high rate of interest, and in many cases the borrower cannot meet the new monthly payment schedule and will lose the house.

Many of these refinancing deals are offered to borrowers with poor credit. Managed properly, a refinancing deal can be beneficial, and may be the only option available for an individual who is in a bind—but borrowers must proceed with caution when seeking such a loan.

Sometimes, unfavorable terms will be included in a mortgage contract by a lender, for the purpose of taking advantage of a borrower that is uninformed. Price gouging also may occur, when a lender charges higher interest rates or fees than what the borrower could have found elsewhere. Unfortunately, it’s often difficult to differentiate between simple price gouging, and the standard practice of charging higher rates for borrowers with lower credit scores. For example, a borrower with excellent credit may be the victim of price gouging when being offered a mortgage with nine percent interest; while a borrower with poor credit receiving a mortgage at the same rate would be receiving a good offer.

For the most part, being an informed consumer, studying the contractual agreement, and comparison shopping will prevent most of these types of predatory practices.