How to spot a loan that can bring you down: 6 red flags
Risky loans – deals that can ruin financial lives – have not gone away with the recession. Broken auto loans, home loans, payday loans and loan scams continue. The economic crash, fueled by risky loans, should have convinced us to be careful. But the memories are short. So here are six red flags that should alert you to back off and four tips for safe borrowing.
But first, a rule of thumb: Anyone considering a loan – whether it’s a home loan, car loan, or personal loan of any sort – should consider it. carefully, says Sam Gilford, spokesperson for the Federal Consumer Financial Protection Bureau.
“Consumers should make sure to thoroughly review the terms of any loan before signing on the dotted line, considering alternative options and asking questions about anything they don’t understand,” he said. he stated in an e-mail.
Here are six signs of a risky deal:
Red flag 1: “No credit? No problem.’
Ads promising “No credit?” No problem ”,“ We never say “No” and the like are certainly tempting when you’re short on cash and looking to find your way out of the basement of your credit score.
But think about it: legitimate lenders take the risk of lending money. To make sure you will pay it back, they dig into your credit history, ask you to complete an application listing your assets, debts, expenses, and sources of income, and verify each of your claims. They will also get your permission to remove your credit score.
When a lender isn’t interested in all of this, you’re looking at some trouble – maybe a scam.
Red flag 2: interest periods only
A loan that begins with a period of several months or years in which you only pay interest may seem like a good deal because the payments during that period are smaller.
The problem is, after all of the payments you’ve made during the interest-only period, you’ll still have the entire loan to repay. You are no closer to owning your car or home than you were before and you are still obligated to get the loan.
Red flag 3: Revisable tariffs
Variable Rate Mortgages (ARMs) were a dirty word when ARMs with risky features led millions of homeowners to default as the Great Recession approached. Homeowners accepted ARMs on the assumption that they could refinance or sell when their interest rates increased. But millions of people found themselves stranded when they couldn’t refinance because they lost their jobs or the value of their homes fell to less than the value of mortgages. The United States saw nearly 6 million foreclosures between 2007 and 2015, according to RealtyTrac.
There are good uses for variable rate mortgages. Sophisticated borrowers can, for example, use them for the short term when they have better use of their own money. But it’s risky unless you have the money to pay off your ARM as soon as the rate starts to rise.
Red Flag 4: Super Long Loans
Borrowing is about affordability. Reducing your monthly payments could give you a better home, buy the new car or truck you’re interested in, or just make it easier for you to breathe each month. It is therefore understandable that a 40-year mortgage or seven year vehicle loan would look attractive.
Longer loans reduce your payments a bit by stretching them over several years. But you are paying through the nose for the lien, and the payouts aren’t much smaller. Ask the lender to break down and compare the costs so you can see how much more you would pay for a longer loan. A very long term loan is better than an interest-only loan, but not by much since most of your monthly payment goes to interest rather than equity – your ownership share of the property.
Red flag 5: advance of costs
Simply hang up if you receive a phone call offering you a loan (or “grant”). It is illegal for US businesses to promise credit cards or loans over the phone and require payment up front. Calls like this probably aren’t from lenders anyway. It could be a scammer trying to convince you to send an initial “fee” or “deposit”. You then have to wait for the loan to arrive. And wait, and wait….
Rule of thumb: don’t pay any fees until you have the loan money in your hands.
Red Flag 6: Payday Loans
Payday loans are expensive short term loans with some risky features. Typically, you give the lender a post-dated check for the amount you borrow plus fees, to be taken from your next paycheck. Failure to repay on time leads to increased fees and interest which push some borrowers into deep debt.
Warning features include:
- Astronomical interest rates: On average, short-term payday loans charge an APR of 391% (annual percentage rate), according to the Center for Responsible Lending (CRL). In comparison, The Money Talks News Credit Card Center shows credit card rates ranging from about 10 percent to 20 percent. APRs on personal loans can be cheaper.
- Fees that accumulate: Payday lenders cater to people in financial difficulty. If you are late or your check is bad, you can accumulate fees, resulting in more debt than your original loan.
- Repeat the loan: Borrowers who cannot repay a loan when it is due often get new loans, resulting in a cycle of debt that buries them. “Payday loan stores are collecting billions of dollars in interest and fees on a product designed to force borrowers to renew their loans,” says CRL.
- Collection practices: Payday lenders vary, but the worst have a reputation for harassment and relentless collection practices.
Some states prohibit or regulate payday loans. However, 32 states “allow payday lenders and allow loans on the basis of checks drawn on consumers’ bank accounts at triple-digit interest rates, or no rate cap at all,” according to the Consumer Federation of America. Find the status of your state on this CFA card.
4 safety tips
Have you encountered these or other red flags when shopping for loans? Share with us in the comments below or on our Facebook page.
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