While there are many excellent financial products available that can help you achieve your goals, there are a few loans, lines of credit, and services to avoid because of their expensive fees and problematic terms. To help you make wise borrowing and financial service choices, this program will cover:
- Prime credit, subprime credit, and predatory lending
- Types of subprime credit products: payday loans, finance company loans, expensive credit cards, car-title loans, and pawn shop loans
- Types of fringe financial services: check-cashing services and rent-to own retailers
- Recovery methods
- Financial alternatives
Chapter 1: Prime Credit, Subprime Credit, and Predatory Lending
There is a wide spectrum of financial products, ranging from loans and lines of credit that have excellent terms to those that are much more costly. The type that you may qualify for depends on many factors, including your current finances and how you have treated credit products in the past.
If you are in the market for a low-rate loan or credit card, be aware that you need to have a long and proven history of borrowing and repaying money responsibly and, in many cases, a certain amount of income and assets in order to qualify. However, if you don’t meet the standards for the very best products now, it doesn’t mean you can’t in the future.
Top tier credit is called prime, and anything under that is subprime. While a few subprime credit products can create rather than solve financial problems, not all are negative. For example, using a credit card that has a higher than average interest rate can help you build a great credit history so you can qualify for better products down the line.
Prime credit products have the lowest interest rates, few and reasonably priced fees, and favorable repayment terms.
Every financial institution sets its own lending standards, though in general you can qualify for prime credit products by having an excellent credit rating, a stable income, and some assets. If you do, the financial institution takes little risk in lending you money because you have demonstrated that you’ve repaid what you’ve borrowed before, have enough income to pay what you borrow, and have property that they may be able to take if you fail to pay in the future.
Subprime financial products, on the other hand, have interest rates that are higher than the prime products. They also tend to have more expensive and excessive fees, and less than favorable repayment terms.
If your income is low, or if you have few assets, already owe a lot of money, have an inconsistent payment history, or haven’t yet established a positive credit rating, you probably will not qualify for prime credit. A lender will likely perceive you to be a high-risk borrower and offer you loans and lines of credit with a subprime rate.
It is possible to use subprime credit products to your advantage – all you have to do is pay the loan or credit line on time and in full. However, if you regularly spend more than you earn and then rely on expensive credit products to make ends meet, your financial problems will increase rather than decrease. Borrowing money when you are already in over your head can offer temporary relief, but in the long run it just leads to more debt that you’ll soon have to deal with – especially if you are using costly subprime credit products.
Predatory Lending and Financial Services
Some financial services that cater to the subprime market are considered predatory. Predatory lenders deceptively convince borrowers to agree to unfair and abusive loan or credit terms. The interest rates and fees for the products they offer are unusually high – far greater than prime – and the terms make it difficult for the borrower to repay the debt. For secured predatory loans, if you are late on a payment, the lender may be able to claim the property that secures the loans quickly and aggressively.
While predatory lenders may target lower-income and minority borrowers and cash-strapped senior citizens, people from every ethnic group, age range, neighborhood, and income and education level are victims.
A federal law called The Truth in Lending Act ensures that all lenders disclose their loan or credit card terms in the application or contract. If you are seeking a loan or credit card, be sure to read the contract and understand the terms before signing the agreement.
If you believe that a lender unlawfully changed the terms, misled you, added products you didn’t agree to, or coerced you into accepting a credit product that had worse terms than you are qualified for, contact the Federal Trade Commission and file a complaint: www.ftccomplaintassistant.gov or call 1-877-FTC-HELP (382-4357).
It is important to keep in mind that not all subprime loans and lines of credit are predatory in nature. If the interest rate is high and the terms are poor, it is probably because the lender is taking a risk in lending you money. Remember, prime credit is typically reserved for those whose financial circumstances are stable and who have established a long and positive credit history.