Loans

  
     

GENERAL INFORMATION

Summary of Important Points

  • Know your lender.
  • Ask questions.
  • Read the fine print.
  • Keep copies of all signed documents.
  • Obtain a copy of the Truth in Lending Act, so you know your rights.

Getting a loan can be a very important decision, but finding and good lender, knowing the right questions to ask, and knowing what to watch out for can be difficult. Unscrupulous lenders often target consumers who are most vulnerable: the unemployed, low-wage earners, minorities, the elderly, and those who have poor credit ratings. Also, while many loan scams result from fraudulent lending practices, many legitimate lenders use tactics to lure consumers into accepting loans they know you cannot afford.

No matter how much money you are borrowing, or what kind of loan you are getting, there are some basic guidelines to follow that will help you make better decisions about your loan. This document also provides you with specific information about different kinds of loans and lending tactics that can put you at financial risk.

QUESTIONS FOR YOUR LENDER
Ask these questions of several different lenders to ensure that you are choosing the best lender. Each question should be carefully considered based on your situation.

Ask your lender:
How much are my monthly payments?

Ask yourself:
How big a monthly payment can I handle, given my income and my other financial responsibilities? What is the smallest loan I can take out that will satisfy my needs?

Ask your lender: 
How many years will I be making payments on this loan? 

Ask yourself: 
If it will be a number of years before the loan is paid off, do I have an income that is secure enough to know that I will be able to make payments well into the future?

Ask your lender:
Is the annual percentage rate (APR) fixed or adjustable? 

Ask yourself:
If the APR is adjustable, will I be able to make sufficient payments if the rate increases?

Ask your lender:
Will I be charged any additional fees?

Ask yourself: 
Are these fees reasonable? How do they affect my ability to pay off the loan? Are these fees refundable if I refinance my loan?

Ask your lender: 
Will the interest rate increase if I default on my loan?

Ask yourself:
If the interest rate increases, will I be able to make the necessary payments?

Ask your lender:
Does it help me in the long run to refinance my loans? 

Ask yourself:
If I refinance, I may pay a lower monthly premium, but may end up paying more in the end. Is it worth it for me to refinance?

AVOID ANY LENDER WHO…

  • tells you to indicate on your loan application that your income is higher than it actually is.
  • pressures you to apply for a loan or to apply for more money than you need.
  • pressures you into monthly payments you can’t afford.
  • pressures you to sign documents you haven’t read.
  • promises one set of terms when you apply and gives you another set of terms to sign—with no legitimate explanation for the change.
  • tells you to sign blank forms and says they’ll fill them in later.
  • says you can’t have copies of the documents you have signed.
  • asks you to sign a loan that has credit insurance or any extra products you didn’t want.

OTHER TIPS
Make sure you talk to someone you can trust before making any decisions about a loan. Attorneys, financial advisors, and non-profit credit and housing counseling services are good sources to help you make the best decision about your loan.

Negotiate. You can always ask your lender to lower the APR, take out a charge you don’t want to pay, or remove a loan term that you don’t like.

Make sure you understand all of the items on the forms before closing.

Don’t be afraid to ask questions and be assertive about what you want, what you don’t want, and what you can and can’t afford.

Be sure to keep all copies of all the actual documents you are asked to sign.

Remember: Trust your instincts. It is important that you feel comfortable with the amount of debt you owe. If it feels like it is more than you can handle, you should consider ways to make your loan more manageable or think about ways to avoid taking out a loan altogether.

ONE MORE THING…
You have three days to cancel your loan

  • Under the Truth in Lending Act, you have three days to cancel your loan if you are using your principal residence (not a vacation home or second home) as collateral. If you feel uneasy about a loan you have already signed, within three days after signing you should discuss canceling your loan with a trustworthy financial advisor. (See more information below about the Truth in Lending Act).

ADVANCED FEE LOANS
The most widely used loan scam is known as an "advance-fee" loan. In 2004, the average advanced-fee loan victim lost $1,560. The scam involves impersonating legitimate lenders who offer, or sometimes “guarantee,” approval for a loan regardless of the borrower’s credit history. However, to take advantage of the offer, the consumer must pay a fee up front. The lender then takes off with your fee and the loan never comes through.

A common strategy for advanced-fee lenders is fraudulent telemarketing schemes, commonly referred to as “boiler rooms”. Typically the lender specifically targets consumers who are out of work or have poor credit ratings. The lender pressures consumers into signing on to a “guaranteed” loan over the phone that includes advanced fee payments. The consumer agrees to have the fees electronically debited from their account. The lender then takes the fees and the loans never arrive.

Sometimes, advanced-fee lenders impersonate legitimate lenders by stealing or forging logos and letterheads from legitimate companies and drawing up fake contracts. Some lenders may even commit identity theft with the information they collect from you.

Advanced-fee frauds are also promoted through legitimate media outlets, newspapers, magazines, and classified ads. They often feature toll-free 800, 866, or 877 numbers. Sometimes they use area codes from Canada, such as 416, 647, 905, or 705. Don’t be fooled. Just because they advertise in a legitimate medium, don’t assume they are a legitimate company.

Also, advanced-fee lenders often ask you to send fees through Western Union payable to an individual, rather than a business.

Keep in Mind

  • Ignore any offer that guarantees a loan for an advanced-fee
  • Legitimate credit offers do not require an up front payment. Legitimate lenders may charge for application, appraisal, or credit history. However, these fees are taken from the amount you borrow and these fees are generally paid to the lender or broker after the loan is approved
  • Legitimate lenders do not “guarantee” loans regardless of credit history.
  • Do not agree to a loan over the phone without written documentation.
  • Do not make a payment to an individual for a loan. Always make sure any fees associated with a loan goes to a business.



PAYDAY LOANS

Cash advance loans, check advance loans, or deferred deposit check loans
Ads over the internet or through the mail may offer fast, easy cash, but these loans can come at a very high price. Known as “payday loans,” check cashers, finance companies and other lenders make small, short-term, high-rate loans for quick cash before your paycheck. This practice is especially appealing to someone who has limited access to other forms of credit.

How do payday loans work?
Usually, you write a personal check payable to the lender in the amount you wish to borrow (say $100) plus a fee (say $15). You receive $100. The lender holds the check until your next payday and then deposits it in the amount of $115. In this example, the cost of the initial loan is a $15 finance charge, which is the same as paying interest at an annual percentage rate (APR) of 391%. Additional fees are added if you “roll-over” the loan, that is, if you wish to extend the term of the loan, adding new fees for each extension. Loans are often automatically rolled-over if you fail to pay off the loan on time, automatically adding additional costs to your loan.

In New York, payday loan offers come from out-of-state lenders, because the amount of interest that can be charged by a New York lender is set by law. Payday lenders cash in on extremely high interest rates as well as the borrower’s inability to make payments which lead to mounting roll-over fees.

What I can do to avoid abusive lending through payday loans?

  • Use a payday loan only if it is absolutely necessary. If you decide to use a payday loan, borrow the smallest amount possible that you know you can pay back with your next paycheck.
  • Find the best deal. Compare the terms and fees of different lenders before you take a loan.
  • Know the conditions of the loan. Lenders who make payday loans are required to disclose, in writing, the annual percentage rate (APR) and finance charges for the loan. Avoid lenders who do not offer this information or who refuse to put it in writing.
  • Consider other options. Look into small loans from a credit union, an advance from your employer, or a loan from family or friends. You may also be able to get a cash advance on a credit card. While the interest rate on this cash advance may be more than other sources of money, it’s a lot cheaper than a payday loan.



REFUND ANTICIPATION LOANS
In 2003, 77% of all taxpayers got money back on their taxes. Those refunds averaged around $2,100. Not surprisingly, tax refunds represent a windfall for many people eager to receive needed cash. With increased popularity in the last several years, tax preparers are offering what are called “Refund Anticipation Loans” (RALs) to taxpayers who file electronically. RALs allow you to get cash in just a day or two and pay the money back with your refund.

The problem is that the lender fees associated with RALs can translate into annual percentage rates (APR) of about 60 to 650%, far greater than the cost of other kinds of loans.

The net effect of people borrowing through RALs has a negative impact on consumers, particularly on the working poor, a group almost 10 times as likely to take out RALs. According to a National Consumer Law Center and Consumer Federation of America report, “seven million working poor families spent $1.75 billion on RAL fees, commercial tax preparation, and (for some of them) check cashing fees, all in order tog et their tax refund monies less than two weeks sooner than they could from the IRS.”

RALs also undermines the effectiveness of the Earned Income Tax Credit, designed to support low-wage workers. NCLC attorney, Chi Chi Wu states, “These fees transfer billions in wealth, paid out of the U.S. Treasury, from working poor families to multi-million dollar corporations.”

What can I do?

Wait a couple weeks.

  • If you wait about two weeks, your refund will be processed and in your hands without any charge. And, if you get your refund direct deposited into your bank account, it may be even sooner. Even if you have urgent bills to pay, is it worth it to take out a new pricey loan to take care of an old bill?

Consider reducing or eliminating your tax refund.

  • If you have received a tax refund it means that each paycheck you get is less than it could be. By making adjustments in your W-2 form, by increasing your “personal allowances,” you can increase your paycheck, so that you get more money spread out over the whole year, rather than in one lump sum at tax time. This means that, by the time you file your tax return, almost all of the money you would be borrowing against your tax return would already be in your bank account.

Get free tax assistance

  • The IRS Volunteer Income Tax Assistance (VITA) program, which operates with IRS-trained volunteers, can be found in libraries, community centers, and other locations during tax time. For the nearest VITA site, call (800) TAX-1040.

HOME EQUITY LOANS
With increasing popularity, home equity loans are an efficient way to get sizable amounts of credit. However, there are many risks associated with home equity loans.

Home equity loans allow you to borrow against the equity of your home. In other words, you are using your home as collateral in order to borrow large sums of money.

Home equity loans are attractive to borrowers because it is an efficient way to borrow large sums of money. However, if you cannot make the required payments on your loan, you put yourself at risk of losing your home.

What is Equity?
“Equity” is the down payment you made on your home, plus the principal you have paid since your down payment, plus the increase in value of your home since you bought it.

Equity = down payment + principal + increased value of home

For example, let’s say you buy a house at $100,000. You make an initial down payment of $20,000 and you have paid $10,000 toward the principal of your property. In addition, your house is now valued at $120,000, up from $100,000. In this scenario, you have $50,000 in equity.

People use home equity loans for a variety of reasons, including debt consolidation, education, home improvements, medical expenses, emergencies, and big-ticket purchases. Because home equity loans are often used to finance very important or even emergency transactions, borrowers of home equity loans must be especially careful about possibly fraudulent lending practices. In general, abusive lenders will specifically target the elderly, minorities, and those with low incomes or poor credit. If you fall into one of these categories, borrowing based on your home equity can be especially risky.

CREDIT INSURANCE
Credit insurance protects the property used to secure your loan, however, many people see this as an unnecessary cost on top of their loan. If you do not want credit insurance, tell your lender. Avoid any lender who pressures you into getting credit insurance. Lenders cannot deny your loan simply because you have declined the optional credit insurance.

BEWARE!
Beware of equity stripping. Some lenders may ask you to “pad” your income to help get your loan approved. You are being set up. This may help you get your loan quicker, but you may not have enough income to make the required monthly payments and could lose your home.

Beware of balloon payments. If you have fallen behind on your payments, and face foreclosure, some lenders will offer to lower your monthly payments. Look carefully at the terms of the loan. The payments may be lower because you may be paying only the interest on the loan. At the end of the loan term, you will be asked to pay the entire amount you borrowed, due in one lump sum. This is called a “balloon payment” and often results in the loss of your home.

Beware of high-LTV loans. Some lenders offer high “loan-to-value” products. This often means that you get a home equity loan that puts you in debt above the value of your home (i.e. if the combined debt of your mortgage plus your home equity loan surpasses the value of your home). This can put you at severe financial risk and should be avoided.

Beware of prepayment penalties. Prepayment penalties are additional costs added to the loan amount if you pay off the loan before the end of the loan term. Prepayment penalties can add up, and lenders can deceive you into signing off on a prepayment penalty. Make sure your lender has disclosed all the information about whether there are prepayment penalties, the cost of the prepayment penalties, how these penalties might affect your ability to refinance your loan, and under what conditions you might owe prepayment penalties.

For more detailed information on home equity loans, visit the Federal Trade Commission website:

http://www.ftc.gov/bcp/edu/pubs/consumer/homes/rea11.pdf 
or visit
http://www.bankrate.com/brm/hstep.asp

COSIGNING A LOAN
If you are asked by a friend or relative to cosign a loan, make sure you understand your rights and obligations. First, under federal law, creditors are required to give you a notice that explains your obligations. The cosigner’s notice states:

INSERT STATEMENT

In most states, if your friend or relative misses a payment, the lender can collect from you without first pursuing the borrower. You will also be liable for the fees associated with the missed payment.

If you need to cosign a loan consider the following first

  • Be sure you can afford to pay the loan. Defaulting on a cosigned loan can result in a lawsuit or a damaged credit rating.
  • You may be able to negotiate the terms of your obligation. For example, you may ask to limit your liability so that you wouldn’t be obligated to pay any late fees, court costs, or attorney’s fees.
  • Ask the lender to agree, in writing, to notify the borrower of a missed payment before pursuing you. This might give you time to talk to the borrower, make back payments, and with the problem before it is your full responsibility.
  • Make sure you keep all copies of the contract and warranties.
  • Also, be sure to get a copy of the Truth-in-Lending Disclosure Statement to know your rights.

Knowing the Terminology
Confusing terminology can make it more difficult for you to make the right decisions about what you want and need, and easier for fraudulent lenders to sign an agreement you don’t know much about. Below are some basic terms you need to know when signing a loan.

"Pre-approved" vs. "Pre-qualified"
Don’t confuse a legitimate pre-approved credit offer with a legitimate pre-qualified offer from mortgage brokers, banks, savings and loans, and credit unions. A pre-approved offer requires only your verbal or written acceptance. A pre-qualified offer means you’ve been selected to apply. However, you must still must go through the normal application process, and you still can be turned down.

The Truth in Lending Act
Generally, the Truth in Lending Act requires that lenders disclose the terms of a loan, including interest rates and payment due dates, to the borrower.


ADDITIONAL RESOURCES
For more information on loans and loan scams:

Federal Trade Commission:
Web: www.ftc.gov
Phone: (877) FTC-HELP (1-877-382-4357).

National Consumer Law Center
Web: www.nclc.org

Consumer Federation of America
Web: www.consumerfed.org
Phone: (202) 387-6121