Profits as Indicators of Predatory Lending

Large up-front fees, kickbacks and/or uncompetitive interest rates often result in extraordinary profits to predatory lenders, especially if consumers are convinced to undergo frequent refincancings.

Making loans with low fees and competitive rates that are certain to go into default is normally not a highly profitable lending strategy because the amount of the loan may not be recovered after the sale of collateral, giving the lender a financial loss on the transaction. While the borrower remains financially liable for the loan balance, any remainder is unsecured and relatively difficult to collect. However, exceptions include large unsecured loans made in order to obtain other business from the borrower, such as merger and acquisition business, and complex loans that are serviced improperly, as discussed later in this article.

In a loan secured by a home or car, lenders are still likely to take a loss because foreclosure is an expensive process, and foreclosure sales generally yield returns well below the market value of the collateral. The transaction is still profitable to the lender however, if the proceeds of the sale exceeds the loan balance. Thus, some lenders target elderly homeowners who have considerable equity in their homes, and who might be more easily deceived or coerced into taking out a mortgage loan that they cannot afford to pay back. This is one of the most common lending tactics widely considered to be predatory.