Jeanette A. Tucker | 4/19/2005 10:28:33 PM
Borrowers with poor credit histories once were routinely denied credit. Now, people with damaged credit may be able to obtain mortgages, car loans and credit cards. But there is a catch, according to LSU AgCenter family economics professor Dr. Jeanette Tucker.
The catch is that those deals come at higher-than-average interest rates. The family economist encourages consumers who have poor credit to shop for a fair deal that balances the risk with the interest rate.
Lending money at higher-than-average interest rates to consumers with poor credit is not illegal. What lenders must do, however, under the federal Truth in Lending Act, is inform applicants in advance about all terms and costs of the loan including the annual percentage rate (APR).
"Don’t be lured into a very bad lending arrangement called predatory lending," Tucker warns, explaining, "Predatory lenders take advantage of people with very high interest rates, excessive fees, no verification of the borrower’s ability to repay, refinancing of the loan and hidden loan terms such as enormous ‘balloon’ payments that the borrower can’t pay."
The family economist says to shop around and compare different loan offers. Avoid any loans with any of the following features identified by Consumer Action as "red flags" of a bad loan:
• Expensive closing costs. The law requires that borrower be given a "good faith estimate" of all fees and costs for a loan. Costs are often somewhat higher at closing, however, so make certain you have adequate funds on hand. But, if the costs double or triple the estimate, do not accept the loan.
• Balloon payments.
• Upfront fees as a requirement of receiving a loan.
• Telephone solicitations, door-to-door loan offers or any high-pressure sales tactics.
• Credit life or disability insurance policies required by the lender. These are money makers for the lender that will not benefit you. An exception is title insurance when you buy property - get an owner’s title policy.
• Penalties for prepayment. This could cost you if you improve your credit history and want to refinance the loan at a lower rate.
• Unlicensed lenders. Always check with the lender’s licensing agency.
• Documents with missing dates or blank spaces. Make sure the signature lines are part of the entire contract, not loose pages that could be added to a loan with different terms.
• Brokers who ask you to lie on a loan application so that you will qualify. It is a crime to lie on a credit application.
• A broker who recommends that you repeatedly refinance your loan. This is a scam that results in more profit for the lender.
Make sure all the terms you were promised are included in a contract. Get it in writing. After the company’s representative signs and dates the contract, make sure you get a signed copy. If you are refinancing your home mortgage, you have the legal right to change your mind for up to three days after you sign the loan.
Check your credit. When you apply for a loan, the lender will check your credit history. Take a look at your credit report before the lender does. Reviewing your credit report will provide you with a list of most, if not all, of your current debts and give you a chance to make sure they are reported accurately.
Tucker says you can get copies of your credit report from one of the big three credit reporting bureaus: Equifax (www.equifax.com, 800-685-1111), Experian (www.experian.com, 888-397-3742) and TransUnion (www.transunion.com, 800-888-4213). Each report costs about $10.
The family economist notes that in 2005, a new law will give you the right to obtain a free copy of your credit report from all three companies every year. Be on the alert for more information on how to order your free credit report.
For information on related family and consumer topics in family, housing and nutrition, visit the FCS Web site at http://www.lsuagcenter.com/Inst
/Extension/Departments/fcs/. For local information and educational programs, contact an extension agent in your parish LSU AgCenter office.