Not only do lenders need to be careful about whom they lend money to, but borrowers must also beware. If you understand the basic types of loans and the laws that regulate credit, you will be a better consumer.
Loans may be secured or unsecured. A secured loan is money loaned that is backed by some collateral pledged by the borrower, such as a car, stocks, or real estate. If the borrower defaults on the loan by failing to make payments, then the lender has a right to liquidate the pledged collateral to satisfy the loan. Unsecured loans are made solely on the good faith of the parties involved, such as with a personal loan. Most loans require regular timed payments.
Installment Loans
Installment loans are repaid over a specific time (term) with set monthly payments of interest and/or principal. Terms vary by the type of loan. For example, an auto loan might be for 60 months while home equity loans can range up to 180 months, and mortgages up to 30 years (and even 40 years in certain cases).
Debt Consolidation Loans
Some of these loans require collateral, and some require a co-signer. If you use a collateralized debt consolidation loan, you turn your unsecured debt into secured debt, backed by your collateral. These do not reduce your debt, but make payments easier by offering lower interest rates and a longer payment term.
Credit Terms
The Truth in Lending law requires lenders to state charges in a clear and uniform manner so that a would-be borrower can compare rates and charges easily. The cost of credit must be expressed in two ways:
Finance charge: the total dollar amount that credit will cost the borrower. This includes interest plus any service or carrying charges.Annual percentage rate (APR): the cost of credit as a yearly percentage rate.The Fair Credit Reporting Act (FCRA)
Enacted in 1971 and amended in 1997, this act is enforced by the Federal Trade Commission (FTC) and state consumer protection agencies. It is designed to improve the confidentiality and accuracy of credit reports and gives consumers specific rights and protection. Consumers have the right to:
view their credit records at credit reporting bureaus. challenge and correct negative aspects of their record if they can prove there is a mistake, and submit statements explaining why they received certain negative credit marks.have inquirers get written permission before their credit reports are released.not be included in direct mail or telemarketing solicitations based on pre-screened lists obtained from credit bureaus. have claims of disputed information investigated and reported back to them within 30 days. have adverse information involving collections or charge-offs removed from their credit record using a fair "date certain" calculation.
The Fair and Accurate Credit Transactions Act of 2003, an amendment to the Fair Credit Reporting Act, allows consumers to get a free credit report once every twelve months from each of the three national consumer credit reporting companies (Experian, Equifax, and TransUnion). These three major credit reporting agencies have set up a Website—annualcreditreport.com—to provide free access to annual credit reports.
Truth-in-Lending Act of 1968 and Regulation Z
This federal regulation, which is enforced by the Federal Reserve System, requires creditors to establish uniform methods for computing the cost of credit, disclosure of credit terms, and procedures for correcting errors on certain credit accounts. It also grants consumers the right to cancel certain credit transactions that involve their principal residence if they decide not to go forward with a loan.
Predatory Lending
Abusive or "predatory" lenders target people who have cash flow problems, and the loans that these lenders provide have sky-high interest rates and fees. The loans may also be illegal. Particular targets of these lenders are the elderly and people in lower-income brackets who are feeling financial pressure and are struggling to make ends meet. To avoid these lenders, remember a few basic principles:
Do you feel pressured to borrow? Avoid pressure tactics. Have you shopped around for the best deal? Use a variety of lending institutions before you commit to anything. Does it seem too good to be true? Be leery of the "Bad or no credit is no problem with us" offers. Do you understand the terms of the loan agreement? If not, ask that any or all parts of it be explained to you.
Get all the advice that you can: family members, tax consultants, lawyers, or other professionals who have knowledge of these matters. Even if they charge a nominal fee, it could save you much grief and money. You can report abusive lenders by calling the FTC toll-free at 1-877-FTC-HELP.