How to Spot Predatory Lending

Michael Lefler
by Michael Lefler
Updated: May 25, 2020

Nowadays, choosing the right lender requires thorough research, comparisons and accurate understanding of the terms before applying. The lending industry has been “contaminated” by many illegal practices including predatory lending which may drag the borrower into future problems.

What Is Predatory Lending?

This is any lending which imposes unfair or abusive loan terms on the borrower. It can also be defined as a practice meant to inconvenience the borrower to accept the lenders’ unfair terms through exploitative, deceptive, unethical and coercive actions.

Predatory lending only benefits the lender and it, therefore, hinders or ignores the ability of the borrower to repay the loan. Most lenders use this tactic on the lenders who are not familiar with the lending terms.

Main Predatory Lending Victims

Predatory lending targets the customers who don’t know their rights as borrowers or those who don’t understand the terms and conditions of lending. The following are the most affected people:

  • The poor, less educated, the elderly and minorities
  • Customers who need immediate loans to settle emergencies
  • Desperate borrowers who recently lost their jobs.

While the predatory lending practices may not be rendered illegal always, they leave the victims burdened, ruined or even homeless.

Main Predatory Lending Practices

  • False or inadequate disclosure – this is when the lender fails to reveal the cost, risks or even the terms of the loan.
  • Risk-based pricing – this happens when the lender charges a very high risk to the borrowers who have a high probability of defaulting.
  • Inflated charges or fees – when the costs or expenses are much higher than the average costs. For instance, charging higher fees for document preparation on a particular customer.
  • Loan packing – happens when the lender includes additional products to the loan cost. For example, including the credit insurance – which is applicable only the applicant dies.
  • Loan flipping – when the lender encourages the borrowers to refinance an already existing loan to another one, which has additional fees or higher interest.
  • Asset-based lending – when the lender encourages the borrower to apply for a larger loan than what they need. As a result, they will need to refinance it with their assets, instead of on their income.
  • Mandatory arbitration – when the lender includes a language to the credit application, making it illegal for the applicant to take a legal action to defend themselves.
  • Negative amortization – this happens when the monthly payments for the loan are too small such that it cannot even cover the interest. It can make the borrower owe more than the original borrowed amount.

Top Predatory Lending Warnings Signs

  • Rushed paperwork work or approval – take it as a warning sign when your lender rushes you to sign when you have not read the loan requirements
  • When the lender asks you to lie about a specific information
  • When the lender asks you to take a higher loan amount than the one you need
  • If loan has a different rate when compared to that of other applicants
  • When the lender refuses to answer your questions in regards to the loan.

How to Protect Yourself Against the Predatory Lenders

  • Beware of the loan offers which are applied via mails, telephone or even on the door to door applications
  • Don’t accept the lenders who promise you that the loan will be approved even without your credit rating or history
  • Don’t rush to sign a loan application form without understanding the terms and conditions
  • Do not sign any loan application document which has blank spaces

What To Do if You Are a Predatory Lending Victim

Don’t keep quiet when you find out that your rights have been compromised.

  • Enact your Rescission rights
    The right of rescission allows the loan applicant to turn down the loan even after signing the paperwork. It applied when the lender failed to disclose full information. Rescission rights are regulated by the Truth In Lending Act. You can also report to FDIC which addresses the predatory lending issues
  • Sue the lender
    If your documents clearly indicate that your lender violated your application, find a good lawyer and file a lawsuit
  • Refinance your secured loans
    Refinance the loan by finding a new loan when you find that you have been paying more than what you should


The best way to avoid predatory lending is to get a trustworthy lender. It’s also important to keep a close eye on the signs of predatory lending as any lender can try it on you if you are not keen enough. After all, you will need a product which can meet your today’s financial obligations without compromising with your future financial stability.

References and Sources
  1. “What is Predatory Lending?” –

  2. “What Is Predatory Lending Laws?” –

  3. “Predatory Lending Practices and Foreclosure Laws” –

  4. “Understanding Predatory Lending And What To Do About It” –

Mike Lefler shares his interest in a wide range of different subjects, including his love for finance-related writing. The passion for writing, related exceptional skills and his years of study, along with a Master’s Degree at Southwest Minnesota State University led him to become one of the brilliant authors in the massive finance arena and in the area of Financial Planning and Lending Industry.

At the same time, his ability to identify the main points of various aspects and intention to significantly contribute makes him a great team member and a valuable part of 1FirstCashAdvance.

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