Scary loan mistakes to avoid

The Conference Board’s Consumer Index fell to an all-time low in October.* Cautious consumers know that the ghost, ghouls and goblins of Halloween aren’t nearly as scary as the financial damage a major credit mistake can cause. Knowing common loan mistakes can help you to avoid making a risky financial move.

Mistake 1: Agreeing to cosign. Cosigning a loan carries many risks and very little reward. Basically, you are being asked to assume a risk that even a professional lender is unwilling to take. Studies of certain types of lenders have found that for cosigned loans that go into default, as many as three out of four cosigners are asked to repay the loan. The bottom line is that if you are not willing to assume totally responsibility, you should not agree to sign for the loan.

Mistake 2: Not reading the fine print. When you obtain a line of credit or loan, you are entering into a legally binding agreement. Be sure what you are getting into by reading and understanding the fine print. For example, one major lender’s policy reads: “Factors considered in determining the Default Annual Percentage Rate include the frequency and severity of account defaults…and risk on other credit accounts.” This means that they could raise your rate if your overall credit situation changes. This is true even if your payments to the individual creditor are made on-time and as-agreed.

Mistake 3: Obtaining a “cash advance” loan. Often called Payday Loans, these short-term, high-fee loans can turn a temporary setback into major financial crisis. Let’s say you wrote a personal check for $330 to borrow $300 for up to 14 days. The lender would agree to hold the check until your next payday. At that time, the lender deposits the check, you redeem the check by paying the $330 in cash, or you roll-over the check by paying a fee to extend the loan. In this example, the annual percentage rate (APR) is 260.71 percent!

Know of another scary loan mistake? Share it through the comments section.

*This info does not bode well for retailers who are already bracing for a tough holiday season. More on this tomorrow...

Kim McGrigg is the former Manager of Community and Media Relations for MMI.

  • The Consumer Federation of America (CFA) is an association of nonprofit consumer organizations that was established in 1968 to advance the consumer interest through research, advocacy, and education. Today, nearly 300 of these groups participate in the federation and govern it through their representatives on the organization's Board of Directors.
  • The National Council of Higher Education Resources (NCHER) is the nation’s oldest and largest higher education finance trade association. NCHER’s membership includes state, nonprofit, and for-profit higher education service organizations, including lenders, servicers, guaranty agencies, collection agencies, financial literacy providers, and schools, interested and involved in increasing college access and success. It assists its members in shaping policies governing federal and private student loan and state grant programs on behalf of students, parents, borrowers, and families.

  • Since 2007, the Homeownership Preservation Foundation (HPF) has served as a trusted, neutral source of information for more than eight million homeowners. They are partnered with, and endorsed by, numerous major government agencies, including the U.S. Department of Housing and Urban Development and the Department of the Treasury.

  • The mission of the U.S. Department of Housing and Urban Development (HUD) is to create strong, sustainable, inclusive communities and quality affordable homes for all. HUD works to strengthen the housing market in order to bolster the economy and protect consumers; meet the need for quality affordable rental homes; utilize housing as a platform for improving quality of life; and build inclusive and sustainable communities free from discrimination.

  • The Council on Accreditation (COA) is an international, independent, nonprofit, human service accrediting organization. Their mission is to partner with human service organizations worldwide to improve service delivery outcomes by developing, applying, and promoting accreditation standards.

  • The National Foundation for Credit Counseling® (NFCC®), founded in 1951, is the nation’s largest and longest-serving nonprofit financial counseling organization. The NFCC’s mission is to promote the national agenda for financially responsible behavior, and build capacity for its members to deliver the highest-quality financial education and counseling services.