Why I support predatory lending

The issue of so called "predatory lending" is coming up more and more these days. Politicians on both sides of the isle have come out against it, however I haven't heard any of them explain exactly what it is.

While the definition of predatory lending isn't black and white, most would agree that it is basically the practice of lenders convincing borrowers to agree to loans with outrageously high interest rates, fees, or other unfavorable terms regardless of their ability to actually make their payments.

What I find frustrating about those who condemn the practice is that they always totally overlook the fact that the borrowers are agreeing to the terms of the loan. I've never heard of any loan officer taking people's kids hostage, or threatening to remove someone's fingers if they didn't sign a loan agreement. People borrow money out of their own free will -- aggressive sales tactics aren't coercion.

Critics say that predatory lenders prey on people who don't know any better. This makes no sense to me. If you have the legal capacity to sign a contract, then you probably also have the ability to read it. Can't understand the legal jargon? Find someone who does to help you. But don't sign it blindly and then complain about “not knowing any better.”

Many argue that even though they did read and understand what they were signing, they had no choice but to agree to the loan, as their credit is so bad that they couldn't get better terms elsewhere. My response: to bad for you. There's a reason you have bad credit. Sure, it's possible that you were hit by a hit-and-run drunk driver, and had medical bills that exceeded your health insurance's coverage (you do have health insurance, right?). But my guess is that it's far more likely that your credit problems are your fault. I get that everyone makes mistakes from time to time, and it doesn't take many to mess up your credit. But while I might not be willing to automatically label you a deadbeat, I'm not about to bail you out of your high-interest loan either. Again, live with your mistakes, and know what you're getting into. If you can't afford the terms of the loan, don't get it.

Of course the moment I say that, the textbook response is “people don't have any choice but to borrow money, because they don't make enough to pay their bills.” Explain to me exactly how borrowing money makes it easier to pay your bills. Last time I checked, borrowing money put you in debt...another bill. So while it may buy you time to pay your bills, it doesn't make them go away. And that time often comes at a high price.

Many say that predatory lenders lend people money in hopes they default so that the lender can seize their collateral. If that's true, it would be a pretty stupid plan. Lenders make far more money on interest and fees from a paying borrower than they would by selling the collateral of a defaulted one. Lenders are in the business of lending money, after all, not selling seized houses and cars. So I think it's safe to say that lenders would rather you just pay them back.

So why do I support “predatory lending?” Because it makes it easier for everyone to get a loan. Think of it this way – if lenders weren't allowed to charge insanely high rates or fees to those with bad credit, they simply wouldn't loan them anything. And if sub-prime lending stops, then so does a lot of the lender's profits. If their profits fall, where do you think they'll be looking to regain them – that's right, everyone else. So all stopping “predatory lending” would accomplish is keeping all but those with the best credit from getting loans, and raising the terms of those with good credit. How exactly is that a good thing?

So the next time you hear someone whining about “predatory lending,” remind them that the alternative is more than likely “no lending.” Letting people make stupid choices is far better than not letting them have any choice at all.