There have been and there are still many debates concerning predatory lending. Majority of people are accusing lenders of their illegal additions to payday loans, the fact which is true. But there is a minority which transfers that blame to other parties both in the deal and out of it. From those debated few underlying issues have surfaced, issues that are main topic of this article I am writing:
Minority mentioned above transfers part of the blame of predatory lending to the courts. They are saying, and I have to agree with them that courts favour lenders in all disputes between lenders and borrowers. This fact gives courage to lenders. They are willing to include some more illegal components in their loans, knowing that many borrowers will avoid going to the court which in normal cases has strong favour towards those lenders. This minority argues that lenders should secure money transfer, and they should have documents which confirm the debt towards them. But, right now it is up to borrower to make certain that his money is going into the right hands.
The idea of high risk borrowers having to pay back higher interest rates than borrowers who have lesser risk of not paying back their loan is also argued. Large portion of people in loan business agrees with the notion of higher interest rated to borrowers with higher risk. Risk set interest rate principle is unfair at its core. Payday loans were created for people who couldn’t take bank loans. In the case of risk based interest rates it means that discrimination is made against those people who are in fact main target customer group of payday lenders. This notion of risk interest rates was transferred into predatory lending as well. It gives a right to lender to raise the interest rate far above normal rates to certain customers.
Competition in a world of predatory lending is non-existent. And that truth makes over the top interest rates possible. In truth, there is small competition in this world. But many predatory lenders avoid borrowers that are served by other predatory lenders. Because that would decrease interest rates of both of those sides, reducing overall profit of all lenders operating in that certain area.
Fighting against lending
Lack of education concerning loans, their terms and conditions, borrower rights is considered as major reason for existence of predatory lending. Borrowers with such knowledge will have insight in all deals they make with borrowers. They will avoid unfair conditions places in those deals. Blame for this is placed on government and educational structure equally. Their failure lies in non-incorporation of these fields into educational process.
Many people that are fighting against predatory lending and general laws that are protecting those lenders argue against freedom of pricing that is given to lenders. In their arguments they state that lenders should not have a right to decide interest rates and other conditions of loans by themselves. Standardization of loan contracts should be done. All lenders that fail to utilize these standardized contracts should be punished by law.