Module 8: Predatory Lending
Southern New Hampshire University
Predatory practices happen all too often in today’s business world especially when loans are involved. Both parties do carry some responsibility when entering these types of agreements to avoid being labeled as predatory. Some lenders specifically target individuals with bad credit knowing they cannot pay back the loan, but end up getting the money for loan through extremely high interest rates. Another example of lenders conducting business in a predatory manor are a majority of student loan providers. Students get targeted because lenders know that these individuals have little knowledge of loans and therefore will take much larger loans than what they actually need. This is beneficial to them as well because the student will take a long time to pay the full mount back which includes all the years of interest. On the flip side the debtor could act in a predatory way buy taking out a loan knowing he/she will default on the loan or will never be able to pay it back. For this paper we will focus on the lenders.
First we need to define what predatory lending is. Predatory lending is “practice of convincing borrowers to agree to unfair and abusive loan terms. This could be done either through outright deception or through aggressive sales tactics, taking advantage of borrowers' lack of understanding of extremely complicated transactions. Predatory loans, for instance, for the purchase of a home, could lead to foreclosure.” according to invest dictionary.com. In the case of lenders targeting individuals with bad credit or lending them more than what their income can support is a predatory practice. It is defined as an “unjustified risk-based pricing”. Unjustified risk-based pricing is:
This is the practice of charging more (in the form of higher interest rates and fees) for extending credit to borrowers identified by the lender as posing a greater credit risk. The...