A Poor Economy Spells Predatory Lenders and Unethical Creditors

October 14th, 2008 | by HelpingU |

While downturns in the economy might force ethical lenders to become more careful about extending lines of credit, the opposite is true of predatory lenders who prey upon consumers in difficult circumstances. It may seem that creditors are not writing new loans or opening new lines of credit for consumers with good credit scores and that is generally true in a poor economy. Creditors would much rather stake a higher risk consumer and charge them considerably higher interest rates. This makes it possible for the creditor to earn a greater return in a shorter period of time regardless of the fact the higher risk consumer will probably end up defaulting somewhere down the line.

Predatory lenders often pile up mountains of consumer debt and then sell that debt to other banks and lenders who have experienced collections departments or who employ in-house collection agencies to go after debtors. If the collection attempts fail, those bad loans can be deducted as operational business losses by the creditor and written off as an ordinary loss less 10%.

Companies like Capital One and HSBC are at the top of the list because they issue high interest rate cards to anyone who will sign on the dotted line and charge them ridiculous interest rates and fees. When the cardholders default on the loans, the issuiing banks who traditionally took the damage as a tax write-off, are now strapped for cash and lack sufficient equity to leverage more consumers into their trap.

If you are wondering how this scenario could possibly be profitable, it is in the short term but in the long run, this strategy is fatalistic, as we are seeing with the recent collapse of the lending industry which has required federal bailouts. This doesn’t mean that these lenders who started the mess with their unethical tactics are going to close up shop and run away, in fact, it means the opposite. Expect more and more high risk lines of credit to be opened by people with poor credit histories and more predatory lenders targeting these high risk consumers because the American taxpayer will foot the bill in the end.

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