"The title insurance policy
should be something competitive," says Taylor. And if you're
refinancing, you should get a refinance rate on the policy -- often
half the cost, he says. "In terms of points, you shouldn't
pay more than 1 to 2 points even in subprime situations. You can
find competitive subprimers who will make you loans at those rates."
6. Additional services you
don't want or need. Some loans are bundled with insurance
policies to pick up payments or pay off the loan if you die or become
disabled. Assuming you want the coverage (and can't get it cheaper
from your insurance company), the problem is that many times you
pay for the entire policy upfront and it's rolled into the loan
with interest, Taylor says. So if you refinance that 30-year mortgage
after five years, you'll have paid for 25 years of insurance that
you won't use and can't recoup. If you want the feature, look for
a pay-as-you-go version.
7.
A credit card that taps your home equity. You don't want to squander home
equity on a thousand little everyday purchases, says Garcia. "That's a real
scary prospect." 8. High interest
rate. The difference between prime and subprime rates will vary with the
length and type of loan. With a mortgage, 5 percent to 6 percent above prime and
"it's time for the customer to look around and see if they can do better,"
says Allen Fishbein, director of housing and credit policy for Consumer Federation
of America. Even if your credit is bad, shop around and be
sure to include a credit union and a bank that makes both prime and subprime loans
on your list.
9. No minimum loan term. Often
with a payday loan, the entire loan (interest and principal) is
due very quickly, says Fox. That means the borrower will be borrowing
again just to keep pace with the debt, creating a never-ending cycle.
10. Requires a valuable asset
as collateral. It may seem obvious that car-title lenders
and pawn shops are a gamble because you risk losing the item if
you can't come up with cash you already don't have. But consumers
think nothing of putting their houses on the same block with a home
equity loan or line of credit. "The worst are home equity second
mortgage loans, all of the loans that are secured by the
roof over your head," says Fox.
11. Binding mandatory arbitration
clause. What is this? Before you sign for the loan, you forgo
any rights to sue for any reason and instead agree to binding arbitration.
The problem: Many consumer advocates believe that arbitrators' decisions
tend to favor the lenders and deny borrowers the right to due process.
Some of the big lenders are moving away from
arbitration clauses, says Fishbein. But they're still around in
the subprime market.
"This should be freely entered into at
the time of dispute, not as a condition for obtaining the loan,"
he says. "By agreeing to this provision if a dispute should
arise, the table is tilted toward the lender."
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