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...