What is a Predatory Loan?
A predatory loan is one in which the borrower does not benefit from the loan. It is usually, but not always mortgages that are subject to predatory loans, mainly because a mortgage uses your house to secure the loan. However there are other forms of predatory lending like payday loans. In most case people who have predatory loans are going to find themselves in positions where they can't repay the loan. This usually results in them losing their homes and ruins their credit. Even if you can make the payments you will pay far more than necessary for your loan.
Predatory loans are almost always taken by people who have no other options for borrowing money, usually because they have bad credit. This is most common with subprime mortgages in which people who otherwise wouldn't have qualified for mortgages were given loans with particularly harsh terms. The sad part is that the majority of people who took subprime mortgages would have qualified for a regular mortgage if they had gone looking for one. It is not a good idea to assume that just because you have less than perfect credit that you need to settle for a loan with bad terms.
The main issue with predatory loans is that they usually have excessive fees. This can be hard to spot when you are taking a loan since the interest rate is usually not that much higher than for a regular loan. It is with the fees that they really get you instead of the interest rate. Most loans have fees but with a regular mortgage your fees will normally be about one percent of the total amount that you borrowed. With predatory loans the fees will often be more than five percent. That is a lot of money when you look at the total amount of the loan. Also don't underestimate the impact of the higher interest rate. It may only be a couple of percent but it will add up to several thousand dollars over the course of the loan.
The other thing that you need to watch out for when you are taking out a loan is that the prepayment penalties are reasonable. Most mortgages have prepayment penalties that are fairly modest. However with predatory loans the prepayment penalties will be quite harsh and make it impossible for people to pay off their mortgage early. That means that you won't be able to refinance your mortgage a few years down the road when your credit has improved.
You are also going to need to be on the lookout for loans that come with mandatory arbitration to settle disputes. This is effectively signing away your legal rights. You will lose your right to take the lender to court and have to have your dispute settled by an arbitrator of the lenders choosing, hardly a fair system.