If your credit
is damaged but you need cash, you might be tempted to accept a loan without worrying
too much about the terms. But some conditions and clauses should make you reconsider
"There are some extremely
abusive, one-sided contract terms consumers sign because they think that's what
they have to do to get the money," says Jean Ann Fox, director of consumer
protection for the Consumer Federation of America. But often you can find a better
deal if you shop around.
some loan conditions that should make you think twice:
1. Money upfront.
"Money upfront is a really bad sign," says Fritz Elmendorf,
vice president of communications for the Consumer Bankers Association,
a financial services trade group. "Possibly even of fraud."
One nominal application fee is fine, he says. But the point of a
loan is that they are supposed to be giving you money, not the other
2. Changing interest rate.
An adjustable-rate mortgage can be a good thing for some borrowers.
But it should be a trade-off. In return for accepting a little uncertainty,
the borrower gets favorable terms, like a lower rate. Too many times
in the subprime market, borrowers are saddled with adjustable-rate
mortgages simply as the cost of getting a loan, says Michael Stegman,
professor of public policy and director of the Center for Community
Capitalism at The University of North Carolina at Chapel Hill.
If you have a rate that can change,
you have to ask some questions. "You want to know what is the
worst-case scenario, not best," says Norma Garcia, senior attorney
with Consumers Union. "What's the worst this can get? Will
that be OK?"
Realize that a changing rate makes
the loan a much riskier proposition for you. In a recent study of
subprime mortgage refinance loans, ARM features boosted the chances
of foreclosure by 49 percent, Stegman says.
3. Balloon payment. "The
ideal is: Don't have any balloon payments," says John Taylor,
president and CEO of National Community Reinvestment Coalition,
a trade association of community groups. The worst scenario: The
balloon is due early in the loan. "It makes a huge amount of
money due right away, and most people in the subprime market really
can't afford to do that. So for a lot of people, they end up losing
subprime mortgage refinance loans, borrowers with a balloon payment have a 46
percent greater chance of foreclosure, says Stegman.
Too much money. More is not always better. So raise
the red flag if a lender is trying to talk you into a larger loan. Two red flags
if your home is the collateral. If you have to borrow, take the least amount for
the shortest time period with the lowest APR.
5. Excessive fees.
"Some fees are truly legitimate," says Garcia. "Some
are backdoor fees that don't appear in the disclosure." What
you want to watch out for is excessive or hidden fees. Add everything
up yourself. The sum of the terms you shopped should equal what's
in the loan documents. If it doesn't, you need to ask some questions.