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Borrow Smart! Don't Be A Victim!
Information from the U.S. Department of the Treasury's Office of Financial Education
You can make better decisions to improve your current and future financial health by understanding various financial products and services. The information on this web page can help you make smarter decisions and help you avoid becoming a victim of predatory lending practices and scams that cost you money.
This web page provides information and guidance to help you make better decisions, but ultimately, everyone needs to decide what is best for their circumstances. There are many different types of loans and different types of lenders.Some offer deals that may be right for some people in some cases, but not right for you. The best thing that you can do is know what you are getting into and whether you can afford it. That is how to Borrow Smart!
We have provided an overview and summary for each topic listed below. We also have provided several additional resources in the various sections of this web page — places where you can find more information.
Some Financial Products to Watch Out For Borrow Smart -Be cautious before accepting these "deals"...
1. A Refund Anticipation Loan is a really high-interest, high-fee loan sometimes offered by your tax preparer. Be patient, unlike this taxpayer, Ava:
That's more than 10 percent of her refund on fees she could avoid by waiting. If Ava had her refund direct deposited to her bank or credit union account, she would only wait about a week longer to get her money, but she would save $150 in fees — avoiding a loan with almost 400 percent annual interest!
2. Pawn shops accept personal property
as collateral for loans based on the value of the goods. They lend you less
than half of an item's resale value and give you several months to repay the
loan and charge high interest rates until the loan is repaid. Many shops also
charge storage costs and insurance fees. If the loan is not repaid, the pawn
shop keeps the property and may sell it.
3. Rent-to-own services come from
stores renting appliances, furniture and electronics. After the rental period
ends, you own the goods. But if you miss a payment, the store will repossess
the merchandise even if you've already paid more than what it’s worth!
4. Cash advances may seem like an
easy way to get quick cash, but these loans can cost in excess of 20 percent
interest. Fees are steep: 2 to 5 percent of the amount borrowed.
5. Many checking accounts offer overdraft
protection that enables you to draw money from your account, even
if your account balance is $0. Overdraft fees average $30 or $35. That might
seem small, but multiple overdrafts add up quickly. To avoid overdrafts,
ask your bank to tap into your savings account balance when you go over your
6. Payday loans usually are small-dollar,
short-term, unsecured loans that borrowers promise to repay out of their next
paycheck. All you need to do to get a loan is provide the lender with a check
or debit authorization for the amount of your loan plus the finance charge.
Winston needed to go out of town to visit a family member before his next payday. The airfare is $400, which is more than Winston has saved, so he takes out a $400 payday loan to buy the ticket. The loan required that Winston pay off the loan within 14 days and came with a fee of $74.48. However, the lender would not refund any portion of the fee if Winston paid the debt off early. This means that if Winston pays off the loan within:
If Winston cannot repay the loan on time, the loan
is "rolled over" for another two weeks with an additional fee of
$74.48. He has already spent $74.48 to borrow $400. Now his cost of borrowing
has increased to $148.96 and he is not out of debt yet. He now owes $548.96
($400 + $148.96), and his APR continues to climb
There are many internet resources that will help you shop for a bank or credit union. To see if your financial institution is insured, go to:
Another Loan to Watch Out For — Reverse Mortgages What Is a Reverse Mortgage?
A "reverse" mortgage is a loan against your home that you do not have to pay back for as long as you live there. With a reverse mortgage, you can turn the value of your home into cash without having to move or to repay the loan each month.
You typically don't have to pay anything back until you die, sell your home, or permanently move out of your home. To be eligible for most reverse mortgages, you must own your home and be 62 years of age or older.
Most reverse mortgages require no repayment for as long as you — or any co-owner(s) — live in the home. So they differ from other home loans in these important ways:
Because of the unusual nature of reverse mortgages, it is a good idea to get counseling before considering one.Contact a HUD-approved counseling agency to help you decide if a reverse mortgage is right for you. You can contact Clearinghouse at 1-800- 569-4287 or visit http://www.hud.gov/offices/hsg/sfh/hcc/hcs.cfm?filtersvc=hec&filtermultistate=yesResources
The Fair and Accurate Credit Transactions Act (FACTA) became law in 2003.It gives consumers rights to obtain free credit reports.What Is A Credit Report?
In brief, a credit report summarizes your credit history and gives reasons why you have a particular credit score.Your credit score tells a lender, at a glance, how credit-worthy you are. Under federal law, you may obtain one free copy of your credit report from each of the three major credit bureaus every 12 months.The law also requires the three major credit bureaus to provide a single point of contact, so you can request your reports from all three companies with one toll-free phone call, letter or Internet visit. Once you have filled out certain information at www.annualcreditreport.com/cra/index.jsp, you will be directed to individual websites operated by the three nationwide consumer reporting companies.Credit Scores
Here are some important items to know about how companies calculate and use your credit score to determine whether you get credit, how much and at what interest rate:
Your credit score usually is based on the answers to these questions:
Checking your credit reports is the best free way to get an accurate picture of how lenders see you.Go to You also can call 1-877-322-8228; or complete the Annual Credit Report Request form online at www.ftc.gov/bcp/conline/include/requestformfinal.pdf (PDF 40 KB), then mail it to Annual Credit Report Request Service, P.O. Box 105281, Atlanta, GA 30348-5281.Learn the Legal Steps for Fixing Credit Report Errors
The Federal Trade Commission's "Building a Better Credit Report" has information on correcting errors in your report, tips on dealing with debt and avoiding scams — and more, http://www.ftc.gov/bcp/edu/pubs/consumer/credit/cre03.shtm. While fixing mistakes is important, correcting an error in your credit report doesn't necessarily improve your credit score.Protect Your Credit
Beware of credit-repair scams: Usually doing it yourself is the best way to repair your credit. The Federal Trade Commission's "Credit Repair: How to Help Yourself," explains how you can improve your creditworthiness and lists legitimate resources for low-cost or no-cost help,http://www.ftc.gov/bcp/edu/pubs/consumer/credit/cre13.shtm.Resources
Shop for the Best Mortgage TIP: Terms & Interest Are Often Negotiable
Shopping around for a home loan or mortgage will help you to get the best financing deal. The price and terms of a home loan — whether it's a home purchase mortgage, a refinancing, or a home equity loan —are negotiable, and you need to agree to them before entering the deal. You'll want to compare all the costs involved in obtaining a mortgage. You may save thousands of dollars by shopping, comparing and negotiating with your lender.Obtain Information from Several Lenders
Home loans are available from several types of lenders: commercial banks, mortgage companies, and credit unions. Different lenders may quote you different prices, so you should contact several lenders to make sure you're getting the best price. You can also get a home loan through a mortgage broker. Brokers arrange transactions rather than lending money directly; in other words, they find a lender for you.
Whether you are dealing with a lender or a broker may not always be clear. Some financial institutions operate as both lenders and brokers. And most brokers' advertisements do not use the word "broker." Therefore, be sure to ask whether a broker is involved. A broker's access to several lenders can mean a wider selection of loan products and terms from which you can choose. Brokers will generally contact several lenders regarding your application, but they are not obligated to find the best deal for you unless they have contracted with you to act as your agent. Consequently, you should consider contacting more than one broker, and shop around, just as you should with any service.
Brokers are usually paid a fee for their services that may be separate from and in addition to the lender's origination or other fees. A broker's compensation may be in the form of "points" paid at closing or as an add-on to your interest rate, or both.
Obtain All Important Cost Information
Know how much of a down payment you can afford, and find out all the costs involved in the loan. Knowing just the amount of the monthly payment or the interest rate is not enough. Ask for information about the same loan amount, loan term, and type of loan so that you can compare the information.Evaluating Loans
Get the following important information from each lender and broker:Rates
Rates fluctuate with the market, and can vary from lender to lender.
Points are fees paid to the lender or broker for the loan and are often linked to the interest rate. Usually the more points you pay, the lower the rate. Check your local newspaper for information about rates and points currently being offered. Ask for points to be quoted to you as a dollar amount — rather than just as the number of points — so that you will actually know how much you will have to pay.Fees
A home loan often involves fees, such as loan origination or underwriting fees, broker fees, and transaction, settlement and closing costs. Every lender or broker should be able to give you an estimate of its fees. Many fees are negotiable. Some are paid when you apply for loan (such as application and appraisal fees), and others are paid at closing. In some cases, you can borrow the money needed to pay these fees, but doing so will increase your loan amount and total costs. "No-cost" loans are sometimes available, but they usually involve higher rates.
Ask for an explanation of any fee you do not understand. Some common fees associated with a home loan closing are found on the Federal Reserve's Mortgage Shopping Worksheet, http://www.federalreserve.gov/pubs/mortgage/mortb_1.htm#head8.
Down Payments and Private Mortgage Insurance
Some lenders require no money down, while others charge as much as 20 percent of the home's purchase price as a down payment. Low down payments usually mean borrowers have to buy private mortgage insurance, to protect the lender in case the home buyer fails to pay.
Your down payment requirements may be substantially smaller when government-assisted programs such as FHA (Federal Housing Administration), VA (Veterans Administration), or Rural Development programs are available.Negotiate the Best Deal You Can
Once you know what each lender has to offer, negotiate for the best deal that you can.
Have the lender or broker write down all the costs associated with the loan. Then ask if the lender or broker will waive or reduce one or more of its fees, or agree to a lower rate or fewer points.
Once you are satisfied with the terms you have negotiated, you may want to obtain a written lock-in from the lender or broker. The lock-in should include the rate that you have agreed upon, the period the lock-in lasts, and the number of points to be paid. A fee may be charged for locking in the loan rate. This fee may be refundable at closing.Credit Problems? You Can Still Shop, Compare and Negotiate
Whether you have credit problems or not, it's a good idea to review your credit report for accuracy and completeness before you apply for a loan.
Go to www.annualcreditreport.com/cra/index.jsp, which is the only authorized online source for a free credit report. Under federal law, consumers can get a free report from each of the three national credit reporting companies every 12 months.
You also can call 1-877-322-8228; or complete the Annual Credit Report Request form online at www.ftc.gov/bcp/conline/include/requestformfinal.pdf, then mail it to Annual Credit Report Request Service, P.O. Box 105281, Atlanta, GA 30348-5281.
Mortgage Shopping Worksheet:
A checklist for comparing mortgages can be found at: http://www.federalreserve.gov/pubs/mortgage/mortb_1.htm#head8.
Home Equity Loan Red Flags
Watch out for home equity loan offers that do the following:
Note: The information about foreclosure is rapidly changing. Please check the links provided and the resource section for the latest information.Ways You Can Avoid Foreclosure Find Ways to Pay Your Mortgage
Prioritize your spending.
Liquidate other assets. Do you have assets — for instance: a second car, ore jewelry, that you can sell for cash to help reinstate your loan? Can anyone in your household get an extra job to bring in additional income? Even if these efforts don't significantly increase your available cash or your income, they demonstrate to your lender that you are willing to make sacrifices to keep your home.Work with Your Lender!
If you are unable to make your mortgage payment, don't ignore the problem! The further behind you become, the harder it will be to reinstate your loan and the more likely it is that you will lose your house.
Contact your lender as soon as you realize that you have a problem. Lenders don't want your house.They have options to help borrowers through difficult financial times. One way to contact your lender is through Hope Now, an alliance between HUD approved counseling agents, servicers, investors and other mortgage market participants that provides free foreclosure prevention assistance. Call 1-888-995-HOPE (4673).
Open and respond to all mail from your lender. The first notices you receive will offer good information about foreclosure prevention options that can help you weather financial problems. Later mail may include important notice of pending legal action. Your failure to open the mail will not be an excuse in foreclosure court.
If You Have Fallen Behind on Your Mortgage Payments
If you have fallen behind on your payments, consider discussing the following foreclosure prevention options with your loan servicer:
To learn more about Chapter 13, visit www.usdoj.gov/ust/; it's the website of the U.S. Trustee Program, the organization within the U.S. Department of Justice that oversees bankruptcy cases and trustees.
If you have a mortgage through the Federal Housing Administration (FHA) or Veterans Administration (VA), you may have other foreclosure alternatives. Contact the FHA, portal.hud.gov/, or VA, www.homeloans.va.gov, to talk about them.Get Help from a Reliable Source For Legitimate Foreclosure Prevention: Contact HUD
Valuable information about foreclosure prevention (also called loss mitigation) options can be found on the Federal Housing Administration's (FHA's) "At Home with FHA" site, http://portal.hud.gov/portal/page?_pageid=33,717348&_dad=portal&_schema=PORTAL.How to Find a Housing Counselor
The U.S. Department of Housing and Urban Development (HUD) funds free or very low-cost housing counseling nationwide. Housing counselors can help you understand the law and your options, organize your finances and represent you in negotiations with your lender if you need this assistance. To find a HUD-approved housing counselor near you, visit http://www.hud.gov/offices/hsg/sfh/hcc/hcs.cfm; or call (800) 569-4287, TTY: (800) 877-8339.The Hope for Homeowners Program
In 2008, Congress created Hope for Homeowners (H4H) to help those at risk of foreclosure stay in their homes. A key to the program is you working with your lender. For more information, which is updated frequently, see the following web site: http://portal.hud.gov/portal/page?_pageid=73,7601299&_dad=portal&_schema=PORTALAvoid Foreclosure Prevention and Other Recovery Scams Be Cautious of Solicitations
You don't need to pay big fees for foreclosure prevention help! Use that money to pay the mortgage instead! Many for-profit companies will contact you promising to negotiate with your lender. While these may be legitimate businesses, they will charge you a hefty fee (often two or three month's mortgage payment) for information and services that either your lender or a HUD approved housing counselor will provide free, if you contact them.
Don't sign over your house! If any firm claims they can stop your foreclosure immediately, if you sign a document appointing them to act on your behalf, you could be signing over the title to your property.This makes you a renter in your own home!
Never sign any legal document without reading and understanding all the terms. Consider getting professional advice from either:
Consumers need to shop for loans with the same effort they use when they decide to buy a big-ticket item. Your goal is to get the best deal possible, which means:
It may take time to do the research.But if you don't borrow smart, you may be paying the cost for a long time. Be smart, and be wary of anyone offering you a "too good to be true" deal.Avoiding Bad Lenders
Some lenders take advantage of borrowers by:
Identity Theft and Phishing — Is That Message Really from Your Bank?What is Phishing?
Phishing is a scam where Internet fraudsters send spam or pop-up messages to lure unsuspecting victims to disclose their personal and financial information. Some scammers send an e-mail that appears to be from a legitimate bank or business. These messages ask recipients to reply to the e-mail or call a phone number to update their accounts or access a "refund." Don't do it!How To Avoid Getting Hooked by a Phishing Scam:
Before zeroing in on the vehicle you want to buy — new or used — it pays to have your financing already in place. You have several places for borrowing money:
The best way to know what your exact costs will be is to first negotiate the price of the vehicle as though you're paying cash or have outside financing. Once those details are firm, tell the dealer what you've already secured (the length of loan and interest rate).Then ask the dealer if he/she can beat it.Rates and Terms
Keep in mind that interest rates for new cars are lower than rates for used vehicles.In general, new cars also can be financed over longer terms than used ones. In many cases, this equation can make a new car cheaper — on a monthly basis — than a used one.
You can look on the internet to find some cost calculators that can help you estimate costs.How Your Credit Affects Your Car Loan Credit Scores
Here are some important items to know about how companies calculate and use your credit score to determine whether you get credit, how much and at what interest rate:
Checking your credit reports is the best free way to get an accurate picture of how lenders see you. Go to www.annualcreditreport.com/cra/index.jsp, which is the only authorized online source for a free credit report. Under federal law, consumers can get a free report from each of the three national credit reporting companies every 12 months.
You also can a call 877-322-8228; or complete the Annual Credit Report Request Form online at www.ftc.gov/bcp/conline/include/requestformfinal.pdf (PDF 40 KB), and then mail it to Annual Credit Report Request Service, P.O. Box 105281, Atlanta, GA 30348-5281.Repossession
If your payments are late or you default on your contract in any way, your creditor — the one giving you your car loan — or lessor — the one leasing you your vehicle — may have the right to repossess your car. The FTC has provided a publication, "Vehicle Repossession: Understanding the Rules of the Road," where you can learn what repossession may mean to you, http://www.ftc.gov/bcp/edu/pubs/consumer/autos/aut14.shtm.Resources
Tracking your money is a helpful way to manage your funds on a daily basis, save for future expenses, and be able to pay down debt. If you're not sure where to begin, many government resources can help you figure out how to track your money.Money Management Tips
The following tips are from the "Money Smart" curriculum, a free financial education program developed by the Federal Deposit Insurance Corporation (FDIC).Create a Spending Plan
Actually, consider opening at least two accounts, one for checking to pay your bills and one for saving to pay yourself.
Make sure to contact your creditors (such as your mortgage company, car lender, or credit card company) immediately if you won't be able to pay.Explain why, and you may be able to work out a modified payment plan. Don't wait until your account is turned over to a debt collector.
You may want to obtain credit counseling from a reputable credit counselor.A credit counselor can also assist you with a debt management plan to help you pay your bills on time, and possibly consolidate or reduce those loans that you can't pay. A wide range of organizations provide this service, in person, by phone and by internet. Some charge you a lot, and others don't, so look around.
Be wary of credit counseling organizations that:
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