Consumer Publications List

"E-Z" Loans Can Be Danger Zones

If you need a loan, choose the lender carefully. There are many lenders and con artists who take advantage of people who have bad credit, who are young and inexperienced, or who are older and have fallen on hard times. Their "No Credit? No Problem!" loans can come with very high interest rates and fees and have cost some consumers their homes.

Here are some types of loan offers you should be wary of:

Advance-Fee Loan Scams
A woman calls a number listed in a newspaper ad that promises fast approval for loans, even for people with bad credit. She is told she is approved for a $5,000 loan and must send a $250 processing fee in a money order by overnight mail to an address in Canada. She does, but never gets the loan. She keeps calling and gets a recorded message. All she has is a post office box address for the company.

It's always a red flag if a company asks for large application fees or deposits in advance, and especially if they want you to send it by courier or overnight mail. For any loan, you should request written information and review it carefully. All businesses offering loans in Maryland must be licensed with the Maryland Division of Financial Regulation. Call the Division at (410) 230-6097 to see if the company is licensed and if there are any complaints against it.

High-Cost Home Equity Loans
An older couple who have fallen behind with their bills get a call from a lender who offers to arrange a home equity loan. Just before closing, he says that the interest rate will be higher than promised because they didn't qualify for the lower rate. Later, their daughter notices that not only is the interest rate extremely high, but they were charged high points and fees and also charged for credit insurance. The payments are higher than they anticipated, and they are worried about falling deeper in debt and perhaps losing their home.

Be wary of lenders you didn't contact first. Many unscrupulous mortgage brokers solicit by phone or door-to-door. Always shop around for the best loan rates. Check all fees, points, closing costs, terms of the loan and the monthly payment. Ask the lender for copies of the documents you'll be asked to sign, before closing. Ask a lawyer or trusted friend to go over the documents with you. Mortgage brokers should also be licensed by the Division of Financial Regulation.

Mortgage Fraud: "Flipping"
A single mother meets a man who says he can get mortgages for first-time buyers with credit problems. He shows her a house and tells her he can help her buy it, promising to handle all the details. He pays off her debts and gives her money for the down payment, which he tells her to list on the mortgage application as a gift from a cousin. After buying the house, she begins having trouble making the payments, since she's also having to pay for repairs to the leaking roof and a broken stove. After two difficult years, she loses the house to foreclosure. The bank discovers that the house is worth only half what she paid. She had been tricked into getting a mortgage that was more than she could afford, for a house that wasn't worth it.

Avoid lenders who encourage you to put false information on a mortgage application, such as saying your income is more than it is or hiding debts that you have. They may only be interested in making a profit from the sale, not getting you a mortgage you can afford. If you've had credit problems, ask for the free homeownership counseling offered by many community organizations. They can review your income, assets and credit rating to help you work on qualifying for an affordable mortgage.

Payday Loans
A man runs short of money a week before his next payday. He goes to a business that advertises "post-dated check cashing" or "deferred deposit services." The business gives him $400 cash in exchange for a personal check he writes for $440, which it agrees not to cash until the next week. He doesn't like losing the $40 but he needs the money. He ends up going to the business two or three months in a row. It seems he can never save enough money for emergencies.

The high cost of these cash advances eat away at your paychecks and make it likely you will need to borrow again. Some alternatives when you're short on money: Ask your creditors if they will accept partial payments from you. Ask your employer for a pay advance. Some community organizations or faith-based institutions offer emergency loans. Many credit unions offer their members small loans, lines of credit, and overdraft protection.

To prevent money shortages in the future, start a savings account. Ask if your employer offers automatic deductions from your paycheck to savings each pay. Even $10 per pay will add up. If you are continually short of money, you need some help in budgeting. See if you can get budget counseling from a local Consumer Credit Counseling Service. To find one near you, call 1-800-388-2227.

Check-cashing services can only charge up to 10 percent of the amount of your personal check, and the transaction cannot be renewed. Businesses that offer check cashing services must be licensed by the Division of Financial Regulation. If you have a question or complaint about such a service, call 410-230-6097.

Credit Problems? Don't Give Up
Don't assume that your past credit problems will limit your loan choices to only high-cost lenders. If your credit report contains negative information, but there are good reasons for trusting you to repay a loan, explain your situation to the lender. If your credit problems cannot be explained, you will probably have to pay more than borrowers who have good credit histories. But don't assume that the only way to get credit is to pay a high price. Take the time to shop around and negotiate the best deal that you can.

February 2001

Maryland Attorney General's Consumer Protection Division Consumer hotline: (410) 528-8662 or 1 (888) 743-0023 toll-free