Predatory lending is unfair, deceptive, or fraudulent lending practices, usually backed by collateral that can be repossessed or foreclosed on if the borrower defaults on their loan. Lenders are often accused of tricking the borrower into thinking that their interest rate is lower than it actually is and that they will be able to repay the loan. Although predatory lenders tend to target the less educated, the poor, racial minorities, and the elderly, anyone can be a victim of this practice. Predatorial lending may not always be illegal, but it can leave victims with bad credit and unmanageable debt.

Predatory practices in auto financing often make it difficult for consumers to find competitive and affordable vehicle loans. Some known abuses include:

• Auto Loan Markup Or Dealer Reserves: Markups involve third-party lenders who receive payments for encouraging car buyers into loans with higher interest rates. According to the Center For Responsible Lending (CRL), this practice adds $25.8 billion in hidden interest over the lives of many car loans.
• Yo-Yo Sales, Spot Deliveries, Or Conditional Sales: These are deals where the consumer is contacted by the dealership that their financing has fallen through and that they need sign a new loan that usually comes with higher interest rates and/or charges.
• Loan Packing: The practice of adding aftermarket products that are unnecessary and overpriced in an attempt to increase the price of the vehicle and the amount financed.
• Buy Here, Pay Here Dealerships: In house auto loans targeted for consumers with no or poor credit histories. The higher default and repossession rates can result in the same used vehicle going through the dealership several times.

Some Ways To Avoid Predatory Loans

• Work With Reputable Financial Institutions: Work with banks and credit unions that have good reputations for issuing auto loans in your area.
• Research Reputable Dealerships: Research consumer reviews online, check with the Better Business Bureau and ask around town to find out the lending history of the dealership.
• Understand Your Credit Score: One reason predatory lenders are able to take advantage of consumers is they know that many people don’t understand the value of their credit scores. Check your FICO credit score before visiting any lenders, then research your scores to learn the rates to which you are entitled. This will help you recognize when you’re being overcharged.
• Don’t Be Pressured: If you feel that you are being pressured to sign a contract that you’re not comfortable with, leave the dealership.

Some Other Solutions?

Eighteen states, the District of Columbia and the Department of Defense prohibit extremely high cost lending. California Senator Hannah-Beth Jackson introduced a bill (SB 515) earlier this year, that proposes a series of reforms to allow payday loans to better serve their advertised purpose while making the loans safer for consumers. Other solutions include:

• Prohibit back end compensation deals for the selling of costly loans with unfavorable terms.
• Prohibit Yo-Yo scams and ensure more enforcement to prevent them.
• Provide a consistent and transparent means of presenting the cost of the vehicle, all fees, and add-on product sales.

The sub-prime auto lending business is currently under investigation by Federal prosecutors as to how loans are packaged and sold to investors. They are questioning whether lenders disclose the credit worthiness of their borrowers and their ability to pay back their loans. They also hope to prevent dealers from gaining additional profit by controlling interest rates.

Read more about Buy Here Pay Here

For an informative pamphlet about buying a car in California, visit responsiblelending.org.