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Sunday, June 3, 2012

Predatory Lending

Predatory lending is the practice of making loans to consumers who have little ability to repay the loan. It involves the use of deceptive and/or high-cost consumer loans and equity-stripping mortgages. Predatory lenders exploit borrowers by charging extremely high interest and fees. A common element of all predatory loans is exploiting a consumer’s ability to repay. Predatory lending includes both:

* Technically legal, but high-cost, loans
* Outright fraud through deceptive sales practices

Common examples of predatory lending practices include:

* Payday loans
* Car title loans
* Tax refund anticipation loans
* Check-cashing stores
* Pawnshop loans
* Subprime lending institutions
* Home improvement scams

Targets of Predatory Lenders

Predatory lenders often target desperate groups who need money immediately and can’t wait, can’t qualify for or distrust traditional bank loans. Some target groups include:

* Elderly consumers
* Minorities
* Young soldiers
* People with limited education
* Desperate homeowners
* People needing immediate cash
* People with weak credit records
* People living beyond their means

Beware of these Red Flags of Predatory Loans

* Frequent refinancing. Predatory lenders often encourage borrowers to refinance an existing loan into a bigger, longer-term loan, often with a higher interest rate. This is called loan flipping. Fees are charged for each loan.

* Lending more than borrowers can afford. Borrowers are allowed, even encouraged, to borrow more than they can afford. When borrowers are unable to pay, the lender encourages them to refinance or forecloses, often taking away the borrower’s home and the home equity they have spent years building.

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