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Predatory lending facts for kids

Kids Encyclopedia Facts

Predatory lending is when a company that lends money uses unfair, tricky, or dishonest methods to get people to agree to a loan. These practices are often seen as wrong or harmful. Even though there isn't one exact legal definition, it generally means giving people loan terms that are not fair or are very hard to manage.

Sometimes, these bad practices are against the law. Different government groups use the term "predatory lending" to describe many illegal things that happen in the loan business. It's important not to confuse it with "predatory mortgage servicing," which involves unfair actions after a home loan has already been made.

A simpler way to think about it is when a lender tricks someone into agreeing to loan terms that are bad for them. Or, the lender might break the rules of the loan in ways that make it hard for the borrower to protect themselves. Some loans, like payday loans or certain credit cards with very high interest rates, can also be called predatory if their costs are too high.

Predatory lenders often look for people who might be less educated, poorer, or older. However, anyone can become a victim of these unfair loans.

How Predatory Lending Works

Predatory lending usually happens with loans that use something valuable as collateral. This means if the person borrowing the money can't pay it back, the lender can take their valuable item. This could be a car or even a house. The lender then sells the item to make money.

Lenders might try to trick borrowers into thinking the interest rate is lower than it really is. Or, they might make borrowers believe they can pay back a loan that is actually too expensive for them. The lender, or people working for them, can make a lot of money if they have to take back the collateral.

Predatory lending is often compared to loan sharking. However, a key difference is that loan sharks don't even try to follow the law. Predatory lenders often try to appear legal, even if their practices are unfair.

Laws Against Predatory Lending

Many countries have laws to try and stop predatory lending. In the United States, both federal and state governments have laws to prevent these unfair practices.

United States Laws

One important federal law is the Truth in Lending Act. This law makes lenders tell borrowers clearly about the APR (the yearly cost of the loan) and other loan terms. This helps people understand what they are signing up for.

In 1994, a part of this law called the Home Ownership and Equity Protection Act (HOEPA) was added. This act helps identify home loans that are very expensive or potentially predatory. It puts more rules on these types of loans.

Many states also have their own laws against predatory lending. States like Arkansas, Georgia, Illinois, Maine, Massachusetts, North Carolina, New York, New Jersey, New Mexico, and South Carolina are known for having strong laws. Other states with similar laws include California, Colorado, Connecticut, Florida, Kentucky, Maryland, Nevada, Ohio, Oklahoma, Oregon, Pennsylvania, Texas, Utah, Wisconsin, and West Virginia.

These state laws often describe "high-cost" loans. These are loans that have very high fees or APRs. While lenders can still offer these loans, they face more rules and bigger penalties if they don't follow them. This helps protect people from unfair loan terms.

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Predatory lending Facts for Kids. Kiddle Encyclopedia.