How predatory lending works

Predatory lending includes any unscrupulous practices carried out by lenders to entice, induce, mislead, and assist borrowers toward taking out loans they are unable to pay back reasonably or must pay back at a cost that is extremely above the market rate. Predatory lenders take advantage of borrowers’ circumstances or lack of knowledge.

Predatory lending typically means imposing unfair, deceptive, or abusive loan terms on borrowers. In many cases, these loans carry high fees and interest rates, strip the borrower of equity, or place a creditworthy borrower in a lower credit-rated (and more expensive) loan, all to the lender’s benefit.

A loan shark, for instance, is the archetypal example of a predatory lender—someone who loans money at an extremely high-interest rate and may even threaten violence to collect on their debts. However, a great deal of predatory lending is carried out by more established institutions such as banks, finance companies, mortgage brokers, attorneys, or real estate contractors.

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