Lending can be a very profitable business, especially for lenders who take advantage of consumers. Working with a non-profit credit union, like Pacific Service CU, can give you peace of mind in knowing we’re not gouging or overcharging to inflate profits.
Here are five bad loans you may want to say no to:
A “payday loan” or a “paycheck loan” allows you to get your paycheck before it’s been earned. Typically, a customer writes a check to the payday lender for an amount, including a fee. For example, you write a check for $250, but are only given $220 in cash. Fees on payday loans may be between 10-20% of the amount borrowed per occurrence. That may seem okay at the time, but over the period of a year, you could effectively pay 400%.
Rent to own
Rent to own offers are often marketed to customers with bad or no credit, preying on those who don’t have the cash to make a purchase. Consumers can rent to own products like appliances, furniture, electronics – even homes. Seems like a great deal, right? Unfortunately, only a very small amount of the monthly rental payment goes toward principal. The renter ends up paying significantly more over the life of the loan than they would have using another method of financing.
The selling point for rent to own homes is that at the end of the rental period, typically 2-3 years, a portion of the rental payment had been saved and is now your down payment. However, at the end of the agreement period, if the renter doesn’t qualify for a loan or simply doesn’t want to buy, the landlord keeps the money. It would be better to have saved your down payment amount separately from your rental payment because that money would be yours, not the landlords.
A balloon payment is an amount of money owed at the end of your loan term. You could pay monthly payments for years, followed by a one-time, lump sum “balloon” payment for the balance of the loan. This could be a good loan structure for some borrowers, however, be aware. You can get into trouble if you don’t have the funds, equity or good credit to pay off or refinance the balloon at that time.
Fees and Charges
Fees are often necessary to cover operating costs; however, you should be aware and always ask questions. Be wary about being charged cash up front, especially without a signed agreement. Origination fees or buying points may be charged at the time of mortgage closing to “buy down” your rate to a lower interest rate. Use our online calculator to see if this is in your best interest.
There are many variable-rate loans out there. We have many variable-rate options that can be great deals for consumers. But again, be aware. Know how often and by how much your rate or payment can adjust. Ideally your variable rate should be tied to a reputable index, such as the Prime Rate, and your payment should be limited in how much it can be raised.
Be savvy! Ask questions, shop around, read the fine print and be prepared to walk away.