Predatory auto loans are those that are comparatively more expensive than regular auto loans. They may exhibit variable interest rates, high fees or unusually high annual percentage rates. Those who fall victim to predatory lending tend to be the most financially vulnerable. Few federal laws are in place to regulate the practice.
Predatory Car Loans
Generally, a car loan can be considered predatory if the interest rate of the loan is considerably higher than that of others. Such loans not only target customers with low or no credit scores, but may also trick some into thinking they are unwittingly entering a superior deal when in fact they are not. Many such loan agreements tend to be equipped with what is termed "mandatory arbitration"; when an agreement is signed by a borrower, this waives her rights to sue the dealership once she has realized she entered the agreement on unfavorable terms.
Types of Predatory Car Loans
One of the basic types of predatory auto loans is that of a varying interest rate. When the buyer first takes out the loan, he is given a very low introductory rate known as the buy rate. The dealer is then able to increase the rate at his discretion. Because dealers profit from increased rates, they are very likely to increase them. Another method is to insert an assortment of fees and charges onto to the loan, which adds to the outstanding balance. This increased balance raises the amount of interest owed.
Effects
The net effect of predatory auto loans is almost always toward the benefit of the dealer at the expense of the borrower. People who had previously good credit, and who may have otherwise qualified for a loan with more favorable terms, can see their credit rating plummet. Furthermore, those who took out predatory loans because of their poor credit history find themselves in an even worse financial situation than before. According to "Predatory Lending: A New Face of Justice," predatory lending cost consumers $1 billion a year as of 2005.
Laws on Predatory Lending
Unlike the mortgage industry, which in 2010 saw some new regulation under the Dodd-Frank Wall Street Reform and Consumer Protection Act, very little legislation has been put in place to regulate auto loans. The Dodd-Frank Act did, however, introduce the establishment of the United States Consumer Financial Protection Bureau, which will oversee and promote financial awareness among the American public. The bureau will also be charged with researching and investigating any new problems in the loan market so that it can mitigate its negative effects.
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