| It's 'buyer beware' on subprime
loans |
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Don't be afraid to ask, "What's in this for me?"
If the answer is just "the loan," that's not good enough.
In the prime market, an ARM comes with a lower rate. But in subprime
lending, "the benefits are not all that clear," says Stegman.
If you're considering accepting unfavorable terms like an adjustable
rate, balloon payment or prepayment penalty, what's the trade-off?
Cover your assets
If your credit is bad, you might find plenty of lenders who
are willing to help you, if you put up collateral. But unless it's
a first mortgage or a car loan, where the asset being bought backs
the loan, this can be a trap.
"Don't risk a valuable asset for a small loan,"
says Jean Ann Fox, director of consumer protection for the Consumer
Federation of America. "People are betting the entire value
of what they paid for a car when they get a car title loan."
With payday lending, you're putting your bank account at risk. If
you can't pay, some lenders will just keep cashing your initial
check, piling up the bounced check fees and putting your account
and check-writing privileges in jeopardy, says Fox.
And ask about penalties. What happens if a payment
is late or you miss a payment? Can they hike your rate, and if so,
by how much? Are there fees? How much are they? If the terms on
two loans are similar, it could make the difference.
A few areas where it pays to be cautious:
- Weekly payments.
Whether for auto loan or rent-to-own, you will usually pay a lot
more than with traditional lenders. And if you shop around, you
may find it's not necessary.
- Binding mandatory arbitration
clauses. "You give up your right to go to court, but
the lender doesn't," says Fox.
- Multipart deals.
Shopping for a car loan? Negotiate price before you even start
talking financing. "You have to be careful that the dealer
hasn't jacked up the price of the car to make the interest rate
look low," says Fox.
- One-stop shopping. Get
your loan information from more than one place. Getting three
quotes from one lender or broker isn't the same as using three
different sources. "Lenders are not under any obligation
to offer borrowers the cheapest rates for which they qualify,"
says Fishbein. "Mortgage lending today is very much of a
buyer-beware circumstance."
- Emphasis on the monthly
obligation (instead of the entire cost of the loan). "This
downplays the interest and fees associated with the loan,"
says Fishbein. "I think borrowers need to be aware of those
issues, as well as how much the monthly payment is."
Want to make the smart move? Be sure to study the
big picture: the overall cost of borrowing the money, says Fox.
When you look at all the charges and fees, what will it actually
cost you, in total, to borrow the money?
"It takes work," says Fox. But "see
if it isn't worth your time to get the best deal you can."
Dana Dratch is a freelance
writer based in Atlanta.
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