The authors present a rational model of consumer credit in which such lending is possible, and identify the circumstances in which it arises with and without competition. Predatory lending is associated with imperfect competition, highly collateralized loans, and poorly informed borrowers. Under most circumstances competition among lenders eliminates predatory lending.
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Working Paper
Predatory Lending in a Rational World
November 2005
WP 06-02 – Regulators express growing concern over “predatory lending,” which the authors take to mean lending that reduces the expected utility of borrowers.
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