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Saturday, February 13th, 2010

Protecting Your Best Financial Interests

Part of becoming truly financially responsible and independent involves accepting responsibility for your financial situation. Not only do you have the power to improve your finances, you’re the only person who can (and will) consistently watch out for your rights as a consumer.

This point was driven home once again in this post from CreditBloggers.com, in which the author examines one aspect of banking that people probably don’t realize can cost them serious money.

Understanding Overages

Here's a look at how you could end up losing a couple thousand dollars in a few minutes (without even realizing it):

  • You go into your bank to apply for a mortgage loan. A loan officer presents some numbers to you and offers you a loan, which comes with an interest rate that is determined largely by your credit score.
  • If you’re lucky, you were offered the lowest interest rate that your credit status qualified you for.
  • If you’re unlucky (as many thousands of Americans are), you were offered an interest rate with an "overage"—an interest rate slightly higher than the best rate your credit score allowed.

Why would lenders even offer such loans? Because it can be profitable for them:

  • A higher interest rate equals a more profitable loan (because you, the borrower, pay more in interest).
  • A more profitable loan is more attractive to investors (because they can collect more money on it).
  • The bank gets a higher price for the loan, some of which goes to the loan officer as a reward.

According to the post, issuing loans with overages is fairly common, even at some large, well-established banks, which is why you must act as your own advocate when investigating significant purchases.

Protecting Yourself and Your Money

If you aren’t already monitoring your credit report, consider doing so. At the web site annualcreditreport.com, you can view a free copy of your credit report from each of the Big Three reporting bureaus once per year.

And, if you’re getting ready to apply for a mortgage, you may want to pay to view your actual credit score (visit MyFico.com). To determine what mortgage rate you’re likely to get, do some online research or speak with a financial guru you know before hitting the banks.

Additional Resources

Choosing the Mortgage that’s Right for You (PDF)

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Posted in Financial Literacy | No Comments »

Monday, March 23rd, 2009

Warning Signs of Predatory Lending

Predatory lending can devastate consumers.

Predatory loans can come in the form of credit card agreements, mortgages, payday loans and even bank loans.

Although there’s no surefire way to make sure a loan you get is safe, but here are some warning signs that your lender is less than trustworthy.

Lack of Transparency: Any time the terms of your loan are unclear, beware. Some loans come with terms so lengthy and dense with legal jargon that the average borrower has no way of understanding them (think of your credit card agreement).

Hidden Interest: Loan-related costs with names like “fee” or “charge” are often just interest in disguise. These can take the form of “overdraft charges” from a bank, “fees” on a payday loan, or “service charges” on a credit card.

Hidden Add-ons: Some unscrupulous lenders will sneak extra services into a loan’s terms (e.g. home appraisal fees with a mortgage) without telling the borrower that such services may be available elsewhere for less money.

Outright Lies: Writing a borrower’s “stated income” and similar tricks amount only to lying on a loan form. The only way to be certain that information in your loan documents is accurate is to fill them out (or double-check them) yourself.

Redlining: Aiming loans at specific groups of people is illegal. Studies have found that subprime loans disproportionately affected women, racial minorities, less educated people and the elderly. Other groups may be targeted for other types of predatory lending.

Exorbitant Interest: Sometimes, lenders conceal how much interest they’re charging by revealing only short-term interest rates (as with credit card offers) or by disguising interest (see above). Payday loans, for example, can come with a yearly interest rate of more than 300 percent!

The Magic of Negotiation

One way to make sure you aren’t victimized by predatory loans is to know as much as you can about them – that way, you can walk away when warning signs pop up. But keep in mind, too, that part of understanding lending is understanding that almost everything is negotiable.

Asserting yourself by trying to get a lower interest rate or a discount of some kind can signal to lenders that you know what you’re doing and will not be taken in by predatory tactics. Just be sure to do some research first so you know a reasonable rate to request.

Learn more about filing bankruptcy and how it may lessen your financial stress.

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Posted in Bankruptcy and Predatory Lending, Setting the Record Straight about Bankruptcy | No Comments »

Thursday, August 7th, 2008

“Checkbook Loans”: A Wolf in Sheep’s Clothing

While riding a a bus on Chicago's South Side last week, I noticed a particular sign amidst the CTA's ubiquitous row of advertisements offering consumers "checkbook loans."

The sign touted these loans as an alternative to payday loans and their notoriously high interest rates.

But what are "checkbook" loans?

This Chicago Sun-Times editorial hosted by the Woodstock Institute provides some insight into this "new" type of short-term loan that supposedly replaces the evil payday loan.

Illinois attempted to curtail some of the state's payday lending practices by passing the Payday Loan Reform Act in December 2005.

The act brought restrictions on terms of loans, interest rate caps and other mechanisms to prevent overborrowing.

However, payday loan stores found ways to skirt the regulations.

For example, the regulations were put in place for loans under 120 days, but payday loan stores retaliated by making over 1/3 of their loans longer than 120 days, avoiding the restrictions.

To make up for their losses under the restrictions, the companies charged even higher rates for the new loans.

Further, they began marketing the loans under new names to avoid the stigma of the term "payday loan": the new loans were often called "installment" or "checkbook" loans, according to the editorial.

The lesson here is that consumers should always pay careful attention to the terms of loans from cash advance and payday loan stores, no matter what they're called.

Don't let a little change in terminology pull the wool over your eyes. These types of loans have led people to filing bankruptcy.

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Posted in Bankruptcy and Predatory Lending | No Comments »

Monday, July 28th, 2008

Illinois Senator Durbin Proposes Cap on Consumer Credit Interest Rate

A longtime champion of bankruptcy reform, Illinois Senator Richard Durbin has proposed a new bill that would create a national interest rate cap on consumer credit.

Durbin's plan would eliminate the shockingly high interest rates that some consumers find themselves being forced to pay for consumer loans like payday loans, which can come with interest rates in excess of 300% in extreme cases!

Currently, the cap for such loans on military personnel and their families is at 36%—the bill would simply apply this cap to all consumers.

While it is not certain that Durbin will be able to drum up support for this legislation—a Durbin proposal to allow judges to rework the terms of mortgage loans in bankruptcy proceedings failed recently—his latest offering shows that some lawmakers are beginning to take the economic downturn seriously and find ways to make life easier for consumers during this time.

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Posted in Credit and Bankruptcy | 3 Comments »

Thursday, May 1st, 2008

Fed Funds Rate Matches Lowfat Milk–Interest Cuts to 2%

In order to stimulate the economy out of the current recession, Ben Bernanke and the Federal Reserve Board cut the federal funds rate once again, slashing another quarter percent off to bring the rate to 2.0%.

Of course, monthly reports published recently prove that the US is technically not in a recession—still, consumer confidence is low, and a little jump start may prove useful to spurring consumers to purchase loans once again.

(Unlike when they cut the rates six weeks ago, or last September...)

In the meantime, read the Total Bankruptcy handy guide to What the Interest Rate Cuts Mean for You.

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Posted in Bankruptcy and the Economy | No Comments »

Friday, April 18th, 2008

Student Loan Legislation Passed in the House

Amidst concerns about student loan availability and affordability during the credit crunch, the House of Representatives has approved a measure that would allow the Department of Education to purchase federally guaranteed loans that lenders cannot sell to private lenders and also increase the amount of money that students can borrow.

Just yesterday, Bank of America was the latest in a long line of lenders who said that they will no longer make private student loans available as a result of the credit crunch and a lack of financial backing in such asset-based securities from investors.

According to estimates from the Education Department, nearly 7 million borrowers will require more than $68 billion in federal loans this academic year.

Can't make your bills? Learn about filing bankruptcy.

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Posted in Bankruptcy and the Economy | 1 Comment »

Thursday, April 10th, 2008

College Loan Availability Concerns Addressed in New Legislation

In the midst of concerns about student loan availability during the credit crunch, the House Education and Labor Committee approved a bill yesterday that would aim to prevent current market problems in the United States from curtailing the abilities of aspiring college students to obtain student loans.

There has recently been a lot of concern about student loan availability as the current economic climate has prompted investors to stay away from asset-based securities that often provide the backing for student loans.

Just this week, the Education Resources Institute (“TERI”) -- the oldest and largest non-profit guarantor of private education loans in the country -- announced that it was filing bankruptcy.

Other recent developments in the student lending industry had prompted many to call out the Department of Education to take some action and ensure student loan availability for aspiring high schoolers and their parents.

With this issue in mind,  the House Education and Labor Committee's bill (H.R. 5715) aims to prevent students from experiencing any future problems in obtaining student loans as a result of financial market shocks, according to Committee Chairman George Miller as reported in a CongressDaily.com story.

So what will the bill do? H.R. 5715 will strive to get aspiring college students away from relying so heavily on private loans by increasing:

• annual loan limits on federal student loans by $2000 for all students and
• total amounts that students can borrow for their college education.

The bill would also provide parents with six additional months to defer payments on their children's loans.

While this bill may not address every potential issue that could arise with market troubles affecting student loan availability, at least it's a start.

Because when it comes to something as critical as higher education, there needs to be more urgency when addressing such issues.

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Posted in Bankruptcy News and Events | No Comments »