Not all loans are created equal. What may seem like a great opportunity to bring in some additional money to pay bills could actually be a predatory deal designed to dig you deeper into a financial hole. High-interest loans quickly spiral out of control if they’re not paid off quickly, and the resulting debt may be insurmountable. Treat the process of taking out a loan like you would the purchase of a car. Research the company you’re doing business with, read all the paperwork before signing anything, and shop around to get the best deal possible.
The Value of Credit
Credit is a vital part of the economy. Even businesses rely on credit to keep their day-to-day operations running smoothly during temporary shortfalls. However, credit is not a free ride. Borrowed money must eventually be paid back, and lenders wouldn’t be lending if they weren’t making some sort of profit off the loan.
Shop Around
Talk to your bank, and other banks in the area, if you need a loan; see what amounts and rates they can offer you. Start with your own bank. You already have an account set up with them, meaning there should be a level of familiarity on both sides. If you don’t like your current bank, consider finding a new one. Once you’ve gone to several banks you’ll know where your current credit rating stands and what kinds of offers you’re looking at. Don’t make any decisions until you’ve fully researched each offer and understand all the terms in each agreement. If anyone tries to pressure you into signing something right away, that’s a warning sign that you may be getting set up for a higher interest rate. There may also be other harmful terms that you aren’t aware of.
Research
Know what the current interest rates are when discussing loan options. For example, Bankrate lists the current mortgage rates at about 3.6 percent. If you’re trying to get a mortgage on your house and the lender is offering a rate significantly higher than that, it is a sign that they may be a predatory lender.
Risk Factors
If your credit rating is low due to previous debts or credit problems, your interest rates will be higher when getting a loan—you’re a higher risk to the lender than someone with a long history of paying their bills. However, a loan that you can’t pay back will just make matters worse. Your current income level, the amount of time you’ve been at your current job, and your level of education all also play into a lender’s loan terms, because all of these factors contribute to the likelihood that you will be able to pay back off the original principal and the interest it accrues.
Warning Signs
If a lender is offering you a loan with monthly payments you can’t afford, you should refuse the loan. Other warning signs to look for, according to the Center for Responsible Lending, include balloon payments, high interest rates, and a penalty fee if you pay back the loan ahead of schedule. If the agreement gives the lender the ability to refinance your loan without your permission, you should refuse the offer. Always read all the fine print on every document and consult an attorney about any language you don’t understand before signing it. If you can’t afford an attorney or get a free consultation, contact credit counseling agencies or local assistance programs for advice.
Other Considerations
Improve your credit rating by getting a credit card and paying off the entire balance each month. Over time, this improves your credit score. Consider getting a cosigner on a loan for better terms if you have a friend or relative willing to assist you.
During our lives, many of us encounter situations where we need access to cash now. Following these rules will help to make sure that you find the right lender to work with.