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What Is Predatory Lending?

Updated Feb 21, 2023

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Predatory lending is when money lenders use unfair, deceptive or fraudulent practices to entice borrowers, typically those most in need of cash, into taking a loan from them, whether it be for homes, cars or everyday expenses.

While the borrower does end up with a loan and money in their pocket, it is always under terms for which the lender ends up as the beneficiary, such as through extremely high interest rates or excessive fees. While the most common predatory loans center on mortgages, there are many other areas in which the practice can occur, including payday loans, tax refund loans, car title loans and rent-to-own services.

This does not mean, of course, that all such lenders are predatory; there are many legitimate businesses that offer such loans. Unfortunately, there is never a shortage of unscrupulous individuals and businesses that prey on the poor and less fortunate. This is especially true when it comes to lending money. 

Predatory lending practices

Predatory lenders use a variety of tactics to scam their victims out of money. Their schemes revolve around three main elements: making loans based on the borrower’s assets rather than their ability to repay the loan; enticing borrowers to refinance loans in order to collect needless fees, and concealing certain terms of the loan from the borrower.

These are some specific types of predatory lending:

Loan flipping: This is specific to mortgage loans and occurs when a lender provides a loan in return for refinancing a mortgage. While the homeowner receives an initial influx of cash, the amount pales in comparison to the total money the borrower ends up paying in refinancing costs, closing fees and other lender charges. These lenders are also known to repeatedly target the same person, telling them they can refinance any time they need a quick influx of cash.

Excessive fees: These are excessive and hidden fees that are tacked on to a new loan or a loan that’s being refinanced. Anything more than 1 percent of the total loan in fees is typically considered to be unnecessary.

Packing: This is when costs are added into the loan for things the borrower doesn’t necessarily need, such as insurance services.

Equity stripping: This, too, is specific to mortgage loans. Also known as equity skimming, this when a lender approaches a homeowner who is in danger of facing foreclosure and offers to buy the home from them and then allow them to lease it back. This takes all of the home’s equity away from the borrower and puts them in danger of being evicted any time the lender sees fit, regardless of whether the loan is being paid back.

Balloon payments: Predatory lenders will entice borrowers with low monthly payments, only to tack on a large lump sum payment, which most people can never afford, at the end of the loan and at a time when most borrowers believe they are free from the debt.

Prepayment penalties: Predatory lenders are known to hide certain clauses in the terms of the loan that force borrowers into paying a penalty should they pay off the loan early. 

Bait-and-switch: This occurs when agreed-upon loan terms are changed to the lender’s benefit once it comes time to actually sign the loan documents.

Anti-predatory lending

There are numerous things those in need of a loan should look for from a lender before proceeding with a transaction. First, consumers should shop around and ask questions. If in need of a loan, they shouldn’t just take the first deal that comes along.


[Read related story: The Difference Between Debt and Equity Financing]

Borrowers need to look for others, compare terms and ask about terms and conditions before deciding which loan is best. If the loan terms seem confusing, borrowers should tell lenders they need more time to review the documents and have them reviewed by an attorney they trust. In addition, borrowers should never accept a loan with higher-than-normal interest rates or those than include lump-sum balloon payments.

Borrowers should also never sign a blank document and never let the lender talk them into falsifying any information on the loan documents. All the above are cause for concern and definite signs that the lender isn’t looking out for the borrower’s best interest.

Predatory lending laws

There are a number of federal, state and local laws designed to prevent and curb predatory lending. Federal laws pertaining to predatory lending include the Truth in Lending Act, which requires lenders to disclose certain information prior to an agreement, such as annual percentage rate, term of the loan and total costs to the borrower.

The Home Ownership and Equity Protection Act is another federal law that cuts down on predatory lending by ensuring the lender discloses all pertinent information to the borrower. In addition to the federal laws, a number of states have enacted their own predatory lending legislation, including Massachusetts, New York, Illinois, Louisiana, Missouri and Pennsylvania.

Chad Brooks
Staff Writer at
Chad Brooks is a writer and editor with more than 20 years of media of experience. He has been with Business News Daily and for the past decade, having written and edited content focused specifically on small businesses and entrepreneurship. Chad spearheads coverage of small business communication services, including business phone systems, video conferencing services and conference call solutions. His work has appeared on The Huffington Post,,, Live Science, IT Tech News Daily, Tech News Daily, Security News Daily and Laptop Mag. Chad's first book, How to Start a Home-Based App Development Business, was published in 2014.
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