12. Prepayment penalties.
For the borrower, this fee "adds
to the cost of credit," says Fishbein. Reason: If your financial
situation or credit improves, you can't refinance your loan at a
better rate. "It's one of the features we find particularly
bothersome in subprime loans," says Fishbein.
Some credit experts advise avoiding prepayment penalties
altogether. Others caution that one year is fine. Still others recommend keeping
it to three years or less. Prepayment penalties also increase
the odds of foreclosure, says Stegman. In his study of subprime refinance loans,
consumers with prepayment penalties of less than three years had a 15 percent
higher rate of foreclosure. With three years or more, the numbers went to 20 percent. And
make sure the loan doesn't use the Rule of 78 to calculate interest. It's an antiquated
method and "a hidden prepayment penalty," Fox says. What you want to
see instead: the word "actuarial." That means "you pay for credit
for the actual length of time you use it," she says. 13.
Balance transfer fees. "Depending on how much you're transferring,
it can be a lot of money," says Garcia. "It's something that's really
easy to overlook and can cost you hundreds of dollars." 14.
The lender solicited you for the loan. Face it, you get the best terms
when you shop around and compare. If you're just accepting what was offered, you
probably could do better.
15. Teaser rates. Who
are they teasing? The person whose name is on the bill. Read the
fine print, and go with a lender who's willing to give you a good
rate and stick with it.
16. It comes with a
free vacation. "If it's a product that's that good, you don't have
to add something to make it attractive," says Garcia.
17. High pressure tactics.
Are you being urged to sign immediately? "Don't do that,"
says Garcia. Instead, have a third party look through the paperwork.
Some possible candidates: an accountant, lawyer or someone at your
local bank (if they aren't making the loan). Or call a local credit
counselor affiliated with the National
Foundation for Credit Counseling or the Association
of Independent Consumer Credit Counselors.
"If
it's good today, it will be good tomorrow," says Garcia. 18.
The lender is focused on your assets, not your income. Whether you're pledging
your car title or your home equity, if you're a bad risk and the lender doesn't
care, that should set off the warning bells. "The biggest thing that would
send me running: 'no job, bad credit, bankruptcy -- no problem because you have
equity in your home,'" says Garcia. "If you don't have income, you're
going to default, and you will be out of your home." 19.
A slew of "little" red flags. You may be able to negotiate a
couple of unfavorable terms. But if the contract is loaded with them, you might
just want to walk. A multitude of bad loan terms in combination could create a
financial disaster. The most dangerous triumvirate: an adjustable
rate, prepayment penalties and balloon payments. "You really don't want to
have these combinations of terms," says Stegman. Not only are you setting
up a financial risk, but you're also limiting your escape options. 20.
Terms you don't understand. Loans have gotten a lot more complicated. And
with the addition of concepts like interest-only loans, adjustable rates and negative
amortization, you might feel like you need an economics degree just to shop around.
The truth is you might be better off with a more standard loan.
"Borrowers have to be asking a lot more questions
than they were before," says Fishbein. Especially tricky: What's
the payment, how often will that change and what's the worst that
it could get? And if increases are capped, does that mean the lender
will add payments to the end of the loan?
"You need to
do the math," he says, "and ask a lot of questions." Dana
Dratch is a freelance writer based in Atlanta.
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