Predatory Borrowers: Victims or Offenders?
We hear a lot about predatory lenders, they’re often described as evil, unfair and abusive. They prey upon the innocent borrower who has little knowledge of the financial world as a whole and more specifically the lending process. While there is absolutely no argument that could defend the predatory practices of these lenders we can argue that the lender is not always to blame in all cases where loans are given to underprepared borrowers.
The predatory lender is in fact a serious problem but by placing all the blame on a few abusive lenders we forget to look at another serious issue within the lending world: fraudulent borrowers and the overconfident borrower who places little value on honesty and on the responsibility of being, what we might call, a moral borrower.
What is Predatory Lending?
Predatory lending can be described in many different ways. In Canada payday lenders are almost always described as predatory as they prey upon people who need cash quickly and who have run out of all other options. Predatory lenders also target those in need with “too good to be true” lending practices, guaranteed approval and false interest rates. If you’re familiar with the American economy then you’ll have heard about predatory lending in relation to the subprime lending crisis of the early 2000s and the effect it had on the housing market and global economy as a whole.
Subprime lenders, in Canada and the U.S., lend to borrowers who may not be able to maintain their payment schedule. For example a subprime lender might approve a large mortgage so that a borrower can purchase a larger house; the problem is that the borrower probably doesn’t make enough money to actually be able to afford the house. So if the housing market were to crash, as it did in the early 2000s, the house is worth less than the mortgage which means that the house has no equity.
The predatory lender is definitely the “bad guy” in this story but what we often fail to realize is that the borrower can often be as greedy as the lender.
Who is the Predatory Borrower?
A predatory borrower is just as abusive and misleading as a predatory lender; they seek to take advantage of the lending system so that they create a lifestyle that they cannot sustain. They apply for loans and mortgages that they simply cannot afford to repay. They feed fraudulent information to lenders in order to get the money they want and take no responsibility for their actions or the outcome of the lies they have told.
Predatory borrowers often choose to blame the lender for the issues that arise from their falsely acquired loans. They treat loans like free and fast cash and don’t consider the consequences of the debt they’re putting themselves into. The predatory borrower more often than not makes calculated moves and chooses to default before they take any kind of accountability for the mess they’ve made. A predatory borrower is smart, manipulative and knows exactly what they’re doing.
Who’s to Blame?
While it’s not a question that true predatory lenders who seek to take advantage of unsuspecting borrowers are to blame for a significant portion of defaulted loans, it’s also important that we look at the borrowers who loan out a lifestyle that they cannot maintain.
Overindulging in debt and taking advantage of the lending system is just as bad if not worse than the infractions made by predatory lenders. We should think twice before we place all the blame on the lender as there are not all in fact evil money hungry villains.
“Predatory” Loans and High Interest Rates
Unfortunately, in the subprime lending industry, borrowers are often victims of high interest rates. However, what borrowers often fail to realize is that the lenders in the bad credit space often need to fit the cost of their bad debts into the price of a loan – and as predatory borrowers continue to take advantage of the system, bad debts increase and the cost of borrowing stays high.
To fix this ever present issue within the lending industry we need to debunk the popular narrative that lenders are always bad and that all borrowers are simply trying to make ends meet. Bad apples exist on both sides of the spectrum, and they make the application process more difficult and more expensive for the honest borrower.
It’s Not Just the Lender
What we can take away from this is that the cost of a loan rises with fraudulent and/or dishonest borrowers and borrowers are not necessarily duped into the decisions that have now ruined them financially. Although it is the responsibility of the lender to do their due diligence on each loan application, fraud and dishonesty are both challenging obstacles for many lenders to overcome, and thus it is important to factor in the fraudulent borrower as a predatory variable within this financial equation.