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Should You Use Your Assets to Get a Collateral Loan?

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If you need a loan for any reason, whether you’re refinancing high-interest debt or paying for home improvements, you may be considering a personal loan. However, qualifying for an unsecured personal loan can be difficult if you don’t have a stellar financial history, credit score or debt-to-income ratio.

If that’s the case, you might be tempted to apply for a secured loan instead. We’ll tell you everything you need to about collateral loans here.

What is a collateral loan?

A secured loan, or collateral-backed loan, is one backed by your assets, which could include things like a vehicle, a savings account or a piece of property, or real estate.

A person with less-than-stellar credit might have a better chance of qualifying for a collateral loan because the lender knows they can seize that person’s assets if he or she defaults and misses payments on the loan.

Many people may not have heard the term collateral loan in everyday life, but that’s because they’re rarely called by that name specifically. Chances are you’re familiar with some of the most common collateral loans — a home loan (aka a mortgage) and car loans. These types of loans are generally secured by the asset being purchased with the loan.

It’s also not uncommon for people to take out a collateralized personal loan using an asset they’ve already owned for some time. For example, you’ve probably heard of a title loan, which is a type of loan that requires the title of a paid-off vehicle as collateral to back it.

How a collateral loan works

Collateral loans and unsecured loans work primarily the same way. You’ll be required to fill out a loan application detailing how much funding you’re requesting, what it will be used for and sharing your personal and financial details, like your employment history, proof of income and authorization to pull your credit score and history.

After you are approved for your loan, you’ll receive the funds and you’ll be on the hook to make monthly payments until the end of the term, or until the loan is paid off in full. After the loan is paid off, the term of your loan ends, even if you pay it off early.

The main difference between a secured collateral loan and an unsecured loan is that the asset you’ve pledged can be repossessed by your lender if you default on the loan. For example, if you put your car down as the asset against your loan and you stop making your payments, a tow truck can show up in your driveway to haul your car away.

Qualifying for a collateralized loan is easier than qualifying for an unsecured loan because the approval of your application is based on both the value of your asset and your credit worthiness says Michael Dinich, a Registered Financial Consultant from Sayre, Pa.

With an unsecured loan, your credit worthiness is mainly used to evaluate your application. This makes a collateral loan a better option if you don’t have a strong credit score.

You will have to prove the value of your asset to be used for a collateral loan and be able to prove ownership with a title for vehicles or property, or by having your name on the account if you pledge savings or an investment portfolio.

Dinich says specific criteria needed to qualify for a collateral loan will vary by lender and the amount of money you are attempting to borrow.

Types of collateral you can use to secure loans

As mentioned, there are many different types of collateral loans you can apply for different purposes.

Below is a list and summary of some of the most popular types of collateral loans, categorized by the asset used to back them.

A home

Using your home as collateral for a loan is common. A few types of loans that may use your home as collateral include:

  • A new mortgage loan
  • Refinancing an existing mortgage
  • Taking out a second mortgage
  • Home equity line of credit (HELOC)

Home loans such as these can be obtained at most brick-and-mortar banks, or even online by filling out an application and going through the mortgage or HELOC processes.

Loan terms on a traditional mortgage or mortgage refinance can vary from 15 to 30 years. The length of the loan, along with many other factors, will affect the interest rate you receive.

Using your home to secure a loan is something that should be carefully considered to ensure you have the ability to pay the loan payment each month. If you default and your home is foreclosed on, you could find yourself living on the street.

A vehicle

Auto loan. Most commonly, your car will be used to secure the auto loan against its purchase. But, if your car is already paid off, you may be able to use it as collateral against a personal loan instead.

The value of your car will help determine how much funding you can receive when you are using your car as the collateral for a personal or auto loan. The value of your car will be determined by the lender. It may be based on an estimate from a website like Kelley Blue Book, or by finding the sales prices on similar vehicles in your area.

Shop around at several different banks and credit unions to get the best interest rate and terms for your auto or personal loan. The rates can vary quite a bit depending on the lender’s policies.

Terms for auto loans can be as long as seven years, which will lower your monthly payment, but cost more in interest over the life of the loan.

Title loan

Car title loans are also secured using your car as collateral. But in this case, you have to surrender the title of your car to the lender in order to get your funds for a short term of 15 to 30 days. The interest rates on car title loans tend to be very high, in the triple digits, so you should avoid them if possible.

Investments and savings

Using your investment account as collateral on a loan can be a bit more tricky, especially if you want to use a tax-deferred investment, like an annuity, as collateral for a loan.

“Before you use your annuity, ask the bank how they will file the paperwork, and check with your annuity to make sure you can use it as collateral,” said Dinich.

The reason is because tax-deferred investments may be subject to tax penalties if they are used as collateral on a loan.

“That would be a double whammy,” said Dinich. “You’d be paying interest to the bank, as well taxes on the annuity interest.”

That said, banks and credit unions do offer loans on nonqualified investments, such as:

  • Savings and Certificates of Deposits (CDs)
  • Annuities
  • Mutual Funds
  • Money Markets
  • Qualified investments, which are pre-tax investments like 401(k)s, 403(b)s, IRAs, etc.

Dinich said one reason people may get a loan against their savings or investments is to help build their credit history.

Life insurance

Similarly, Dinich says you may be able to borrow against the cash value of your life insurance policy.

“Some people buy cash-value life insurance just to have the option to borrow against it later,” says Dinich.

According to Dinich, this concept is also known as “infinite banking”. The interest paid during the loan term will be put back into the cash value of the insurance policy.

Savings

Although it may sound counterproductive at first, banks and credit unions will also loan money against your savings account balance as collateral.

“Some people wonder why you should borrow against your savings if you have the money,” says Dinich. “But, there are a few instances where it makes sense.”

One example given by Dinich is if your bank or credit union offers perks based on your savings account balance, such as a lower rate on a mortgage loan if your savings balance is $20,000 or greater.

Later, if you’re in a cash crunch, you may not want to take money out of your savings account if it would put you below the $20,000 threshold. Instead, you might decide to take out a loan against your savings as collateral.

Dinich says taking a short-term loan against your savings could also be a way to build or establish credit.

Your paycheck

Future paychecks are most often used as collateral for payday loans. This is the most costly type of collateralized loan available.
According to Dinich, the interest rates can be as high as 400%.

“People get stuck in a cycle of being behind when they take out payday loans,” he said. “Then they have to pay fees on top of the interest in order to continue extending the term of their loan.”

Dinich said payday loans should only be used as a last resort in an emergency. If you must use your future paychecks to secure a payday loan, you should shop around to find an honest and reputable lender, and not be afraid to ask questions.

“The commission rate paid to sales people for payday loans is high, which can make them become pushy and try to hide the fine print about interest rates and fees,” said Dinich.

As an alternative, Dinich says to ask friends and family for a short-term loan, or seek assistance programs available from some employers who may give an advance on your paycheck.

Alternatives to secured personal loans

In addition to secured personal loans and the other types of loans listed above, you may consider trying to improve your credit history and reapply for an unsecured personal loan.

Keep in mind that an unsecured personal loan may have a higher interest rate than a secured loan, and you may be limited to borrowing a smaller amount of money. This is because unsecured loans are riskier for lenders.

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If your credit card has a high enough limit, you may also be able to use it instead of taking out a new loan. However, the interest rate on your credit card is likely to be higher than most secured loan options. If you have poor credit, you may be able to qualify for a secured credit card to help build your credit history.

Another option to consider is to take out a loan from your 401(k) directly. This is not a collateralized loan in the sense that you will forfeit your 401(k) assets if you don’t pay back the loan. You are effectively borrowing from yourself. This can be advantageous because the interest paid on the loan will be put back into your 401(k) as you’re paying yourself to borrow money. However, there are other risks to consider. You’re going to miss out on potential growth for any funds you pull out your 401(k) and if you’re fired or leave your job, your loan will likely come due immediately.

Borrowing smart

Before you opt for any of the choices in this article, make sure you’re being smart with your borrowing. Don’t take on more debt than you afford to pay. Missing payments will not only harm your credit score and make it more difficult to qualify for a new loan in the future, but if you have a collateralized loan, your assets could also be seized to help pay back the loan.

You should also take your time to shop around for the best lender and product to fit your needs. Don’t be afraid to ask questions about any loan product before you apply. If any lender is too pushy, it’s a red flag.

The bottom line

Collateral loans aren’t your only option for getting funding. But, if you can’t qualify for an unsecured personal loan, they may be a good thing to consider.

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The Ultimate Guide to Personal Loans

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Personal loans are a versatile form of credit. You can use them to consolidate other high-interest debts, pay for home improvements and more. Because they usually come with fixed interest rates and repayment schedules, you know exactly how much you need to pay each month and when your debt will be paid in full.

Still, taking on any type of debt is a serious responsibility. This personal loan guide will help you learn more about how personal loans work, which pitfalls to avoid and some alternatives to consider.

Part I: Personal Loans 101

How do personal loans work?

When you apply for a personal loan, you borrow a specific amount of money — most often at a fixed interest rate — for a set amount of time. Then you pay off your balance monthly until it’s paid in full.

The terms of your personal loan will depend on your unique financial situation and your lender. The loans are typically offered in amounts ranging from $1,000 to $50,000, and potentially even higher, depending on the lender. As for the repayment period, the loans’ terms often range from one to five years, but can potentially go up to 15 years for purposes such as home improvement.

Personal loans are unsecured debt, meaning they’re not secured by an underlying investment like a home or a car. For that reason, they usually come with higher interest rates than you might get with a mortgage or auto loan.

To get a real sense of how much a personal loan will cost you, keep an eye on the annual percentage rate, or APR. It includes interest and other costs, which could include an origination fee. An origination fee is a loan processing fee that can typically be 1% to 8% of the loan amount; however, some lenders, such as Lightstream and Discover, don’t charge any origination fees at all.

Pros and cons of personal loans

Pros

  • Interest rates can be lower than credit cards. While interest rates on personal loan offers have risen lately, they can still be a good option for consolidating high-interest credit card debt, especially if your credit is top-notch. The average APR on a personal loan offer from a lender is now 11.81% for borrowers with excellent credit, and 15.61% for those with very good credit, according to recent data from parent site LendingTree; in contrast, companion site CompareCards lists the average APR on all credit accounts is 15.09%.
  • Quick access to funds. Depending on your lender, you may receive funding for a personal loan in just a day or two.
  • Predictable payments and interest. Because personal loans generally come with fixed rates and payment terms, you may not have to worry about your interest rate or monthly payment going up. That makes it easier to budget.

Cons

  • Could lead to overspending. Personal loans can be used for almost any purpose, which could lead you to borrow more than you can afford to repay each month.
  • Higher interest rates than some loan products. For example, if you have equity in your home and good credit, you may be able to get a better rate with a home equity loan or line of credit.
  • Damage to your credit if you don’t pay. Some lenders offer options for borrowers facing financial difficulties, and may work with you if you lose your job or face other financial troubles. However, your credit might be damaged if you ultimately can’t make your payments.

What you may need to qualify for a personal loan

  • Good or excellent credit. If your credit score is 640 or lower, it will likely be more difficult to get approval for a personal loan (although some personal loan companies might still work with you). By contrast, having good credit (a FICO score of at least 670) will give you more borrowing options, and a score of 740 will let you qualify for loans with the best interest rates and terms.
  • Low debt-to-income ratio. Lenders might be hesitant to lend money if your debt-to-income ratio is too high. This ratio is determined by taking your total monthly recurring debt and dividing it by your gross monthly income. For personal loans, lenders usually like to see a DTI ratio of 36% or less. Still, even with a high DTI, you may qualify for a personal loan if your credit score meets a lender’s criteria, and you have both a solid income and credit repayment history.
  • Cosigner or collateral. If you have a bad credit score, you may need a cosigner with good credit or collateral to help you qualify for a personal loan.

How to pick the best personal loan

Here are tips that can help you identify a personal loan that’s right for you:

  • Shop around with different lenders. Gather information on personal loans to compare interest rates and loan terms from various lenders.
  • Read the fine print. Make sure you understand your contract, your monthly payment and all terms and potential fees.
  • Read reviews. Reading reviews of top personal loan companies can help you gauge the quality of each lender and what your experience might be like.

Part II: Common Uses for a Personal Loan

You might be surprised to know just how many uses personal loans can have. According to an April 2020 report from LendingTree, some of the top reasons applicants seek personal loans include:

  • Credit card refinance: 32.0%
  • Debt consolidation: 31.0%
  • Home improvement: 8.5%
  • Major purchases: 5.0%
  • Car financing: 4.3%
  • Business: 1.8%

These numbers don’t mean personal loans are the right choice in every borrowing situation. Here’s some more information about potential uses, along with some pros and cons:

Common uses for personal loans

Debt consolidation

If you’re struggling to pay back several types of debt, a personal loan may let you streamline payments and pay less interest overall. One caveat: if you can qualify for one, a 0% balance transfer credit card could be a less expensive option for combining debt.

Credit card refinance

Personal loans often have lower interest rates than credit cards — just make sure you’ll actually save money after taking into account a loan’s interest rate, origination fee and repayment term.

Home improvement

If you don’t have enough equity in your home to qualify for a home equity loan or line of credit, a personal loan can help finance home improvements. It may, however, come with a higher interest rate.

Major purchase

A personal loan might cost less in interest than a credit card for that big buy of yours. Still, before taking on new debt, consider whether you really need that purchase now — or whether it would be cheaper to save up and pay cash.

Car financing

A personal loan could be an option for buying a car, but it might be easier to qualify for an auto loan, as well as pay less interest and fewer fees (a car loan uses the vehicle as collateral).

Small business financing

If you’re starting a business and aren’t yet earning money, it may be tough to qualify for a business loan. A personal loan can help get your business off the ground. One potential red flag: If your business goes under, you’ll still have to pay back the loan or risk damaging your credit.

Medical expenses

Taking out a personal loan to pay for medical expenses can keep medical bills from going to a collection agency. However, first see if your medical provider provides payment help, as many do. They may be willing to work with you to pay off your balance — and not charge interest.

Part III: Personal Loan Traps and Scams to Avoid

Here are some personal loan traps you should consider:

Advance loan fees

Occasionally, a fraudulent loan company will offer outrageous loans and loan terms with a catch: You must pay upfront fees or “insurance” to qualify.

Look out for lenders who ask you to wire funds via Western Union or MoneyGram — reputable lenders won’t ask you to pay money upfront.

‘No credit check’ loans

According to the Federal Trade Commission (FTC), a lender who isn’t interested in checking your credit is a red flag.

Steer clear of ads and websites that promise “Bad credit? No problem” or “We don’t care about your past,” the FTC cautions. These slogans usually signal a scam.

Precomputed interest

Some personal loans might come with precomputed interest, which means they use the original payment schedule to calculate interest, even if you make payments early. This forces you to pay more interest over time, even if you make larger payments or try to pay off your loan early.

Prepayment penalties

Some personal loans tack on a prepayment penalty if you pay your loan off early. And while prepayment penalties aren’t that common, they are unnecessary. Be sure to read through your loan terms to check for a prepayment penalty before you sign the agreement. If you find one, consider opting for another lender.

Part IV: Alternatives to a Personal Loan

Personal loans vs. credit cards

Credit cards can be a great deal if you pay them off monthly, as you have the potential to earn rewards.

Personal loans vs. HELOCs

A home equity line of credit (HELOC) is a revolving line of credit secured by your home. HELOCs often have lower interest rates than personal loans, and you may be able to deduct the interest if you itemize your taxes. By contrast, interest paid on your personal loan is not tax-deductible.

Personal loans vs. cash-out refinance

A cash-out refinance lets you take out a new mortgage that’s more than what you now owe, and pocket a portion of the loan as cash. It usually comes with a lower interest rate than a personal loan, but with longer terms, so you could end up paying more overall. If you’re opting for a cash-out refinance, check this calculator to determine how much you might be able to borrow, and what your new monthly mortgage payment will be.

Unsecured personal loans vs. secured personal loans

A secured personal loan requires borrowers to use an asset, like a vehicle or certificate of deposit (CD), as collateral. A lender can repossess the asset if the borrower fails to make payments, so interest rates on secured personal loans tend to be lower than those on unsecured loans.

FAQ: Personal loans

The amount you can borrow varies by lender, but generally ranges from $1,000 to $50,000.

Yes, if you use it to consolidate high-interest debts from credit cards or other loans. To get out of debt faster, make sure your new personal loan comes with a lower interest rate than you’re already paying, along with few or no fees.

Your interest rate depends on the type of loan you apply for, how much you want to borrow and the quality of your credit. While each lender is different — for example, some will work with you if your credit isn’t ideal — a FICO score of at least 670 will give you more options.

If you were denied a personal loan due to poor credit, the best thing you can do is work on improving your credit rating. Pay bills on time, pay off debt to reduce the amount of available credit you’re using and avoid opening or closing too many accounts.

Thanks to the internet, you can apply for a personal loan online and from the comfort of your home. You can also compare fees and interest rates from top personal loan companies by visiting this page.

If you apply for a personal loan, a hard inquiry will be placed on your credit report, but any negative hit your score takes will be short-lived. Your credit score will more likely take a larger hit if you borrow too much and can’t repay. On the other hand, repaying your personal loan on time, and ultimately in full, might actually help your score in the long run.

If you’re cash-strapped, this may sound tempting, but most mortgage lenders discourage it. Before approving you for a mortgage, lenders will look at your debt-to-income ratio, so taking on a personal loan to afford a down payment might actually disqualify you in the end.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

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What Is Predatory Lending? What You Need to Know

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Predatory lending occurs when a borrower is pushed (or tricked) into getting a loan with terms that are unclear or deliberately deceptive.

If you’ve ever felt pressured to take a loan where the terms weren’t what you expected, most likely you’ve had a brush with predatory lending. Maybe you also felt harassed — or even threatened — into signing a loan without fully understanding the terms, or before you were ready.

Any lender can engage in predatory lending, whether it’s for a mortgage, car purchase, home improvement loan or a similar borrowing situation. Here’s a guide to what you need to know about predatory lending: common warning signs, ways to fight back and some of the lending alternatives you might want to consider instead.

How does predatory lending work?

With a predatory loan, the loan is most often not what the lender initially described. For example, maybe you were promised a fixed-rate mortgage, as well as a long repayment term, for that new home. Instead, you’re handed an adjustable-rate mortgage — with a very short repayment term that makes it almost impossible to pay back without an expensive refinance that your lender offers to do too. If that happens, you’ve been subjected to a classic bait-and-switch move in predatory lending.

Some borrowers are especially vulnerable to this type of deceit. Elderly borrowers, for example, may have a lot of equity in their homes, but limited access to income or credit. Predatory lenders also prey on borrowers who need emergency cash to pay for unexpected medical bills, or home or auto repairs.

Taking out a payday loan often causes problems too. You might get your money quickly and with little fuss, perhaps at a storefront or online, but those loans almost always carry exorbitantly high interest rates.

Coronavirus: Beware predatory lending practices

In times of crisis, certain lenders may decide to take advantage of consumers who might be experiencing dire financial circumstances. The economic uncertainty caused by the new coronavirus pandemic is no exception, and U.S. lawmakers have already expressed concern about how financially vulnerable Americans may be as they face salary cuts, job losses and the prospect of an imminent recession.

If the pandemic has left you facing financial hardship, avoid using predatory loans to stay afloat. Instead, you may be able to access needed funds — as well as deferments on loan payments, like those that may be available for mortgages — from your bank or credit union. You might also be eligible for an Economic Impact Payment and other resources provided by the federal 2020 CARES Act. To learn more about this major piece of legislation, check this link from our parent company LendingTree.

Predatory lending practices: 8 warning signs

High interest rates and fees

High interest rates and fees are key signs of a predatory loan. If you’re applying for a loan and the interest rate or the loan and documentation fees seem high, ask your broker if they’ll be getting a yield-spread premium from the lender. This is a commission your lender may be paying the broker in exchange for offering an inflated interest rate.

Lack of information

If loan terms aren’t clear to you — or a lender can’t answer your borrowing questions directly — there’s a good chance you’re dealing with a predatory lender. Avoid signing on the dotted line if a lender can’t clearly tell you whether your interest rate (or any other terms) will change over the course of the loan, what fees will be included or if there are prepayment penalties.

False information

Predatory lenders often misrepresent loan terms or may even lie about them. Beware of loan terms that seem too good to be true; they most likely are. Language like “easy payment terms, “no payments for 90 days” or “easy credit” should raise red flags.

Pledges not to perform credit check

Lenders routinely perform credit checks before approving and issuing loans to ensure the borrower can afford to repay. If a lender tells you “no credit check required,” chances are that lender is going to require some form of collateral, possibly in the form of the title to your car or access to a bank account. It’s never a good idea to put other assets at risk for a loan you might not even be able to repay.

Unusual prepayment penalties

When you take out a loan, you generally have the option of either repaying the loan early or refinancing, usually without paying any penalties, or at least with very limited fees. A predatory loan, however, may include steep fees for prepayment and refinancing, and these fees can add up to thousands of dollars.

Doesn’t report to credit bureaus

One of the advantages of taking out any kind of loan is that it can help you build a solid credit history, assuming you make payments on time and your lender reports the loan to credit bureaus. Lenders are not legally required to report loans to bureaus — however, if your loan isn’t reported, it might be a sign your lender doesn’t necessarily have your best financial interests in mind.

Lender access to bank account required

Payday lenders, in particular, are likely to ask for bank account information before handing over a high-interest, short-term loan. If you allow access — and are economically vulnerable — you may get hit with overdraft charges if sufficient funds aren’t available to cover the loan.

Hidden balloon payments

Often, a predatory lender may convince a borrower their loan comes with low monthly payments. The borrower later learns those low rates applied only for a short period of time, and that they will “balloon” at the end of the life of the loan unless the borrower doesn’t refinance. If you’re constantly feeling pressured to refinance your loan, persistent “flipping” may be costing you plenty in unnecessary fees and points.

Anti-predatory lending: What are the protections?

Fortunately, there are legal protections in place to reduce the practice of predatory lending and help consumers fight back. Here are some of the laws that provide support and resources:

  • Equal Credit Opportunity Act (ECOA): This law protects consumers from lending discrimination due to age, gender, race or ethnicity. This law aims to rectify the denial of lending opportunities to minority borrowers, who may have encountered predatory lendering because of discrimination by more traditional lending institutions. If you think you’ve been discriminated against, report it to your state attorney general’s office.
  • Truth in Lending Act (TILA): This legislation requires lenders to clearly, accurately and fairly disclose credit and loan terms to borrowers. It also gives borrowers three days to back out of a potential loan without having to pay a financial penalty.
  • Home Ownership and Equity Protection Act (HOEPA): Lawmakers passed this law in 1994 with the specific goal of protecting borrowers from abusive home lending practices and high-cost mortgages, and further amended it in the years following its enactment. For borrowers getting high-cost mortgages, the act directs lenders to provide them with all necessary disclosures and loan terms, and encourages or requires homeownership counseling.

Most states also have laws designed to protect borrowers from predatory lending. These laws range from those that prevent payday loan companies from operating within the states, to caps on the interest rates the companies can charge. Illinois, for example, limits the interest rate that can be charged on payday loans to 15.5%.

To find more about what’s allowed in your state, visit this site from the National Conference of State Legislatures.

Alternatives to predatory lending

Some credit unions offer payday alternative loans, or PALs, to account holders with poor credit who need a short-term loan. A PAL usually offers more financial stability and less risk than a payday loan; for example, you can pay it back over a period of up to six months. PALs are regulated by the National Credit Union Administration, a federal agency. In order to apply for a PAL, you’ll need to belong to a federal credit union.

If you’re in a tight financial spot, you may be able to receive a payroll advance where you work. Many employers let employees borrow against upcoming paychecks to cover a critical, unexpected expense. In general, you can expect a payroll advance to be far less expensive what a payday loan might cost.

If you have either poor credit or no credit, you can still get a personal loan while steering clear of predatory lending practices. Credit unions, in particular, can be solid sources of personal loans for members who have poor credit, and even traditional lenders may be willing to provide a personal loan to someone with bad credit who also has a cosigner.

A credit card is basically a revolving line of credit you can use to borrow up to the credit limit set by the lender, depending on how much credit you have available and as long as you meet the required monthly minimum payments. Pick a credit card with the lowest interest rate you can get, or take advantage of the introductory 0% interest rates many lenders offer. Then, pay off your credit debt as quickly as possible.

It may feel awkward asking family or friends for a loan, but it may give you more flexible repayment terms. The biggest drawback: If you fail to pay back the loan or make timely payments, your relationship may suffer.

Low-income borrowers who want to avoid predatory lenders can contact the National Foundation for Credit Counseling (NFCC) for help with debt management, and to find a reputable nonprofit financial counselor within the foundation’s national network.

If you’re having trouble meeting financial obligations, tap your lender for potential options. For example, a credit card company might be willing to offer a lower monthly minimum payment or a lower interest rate.

FAQ: Predatory lending

Predatory lending occurs when lenders push (or trick) a borrower into getting a loan with terms that are unclear or deliberately deceptive. With any loan you should always feel comfortable with the terms, and the working relationship you have with your lender. If you don’t, it might be time to step back.

Balloon-type mortgages can be predatory if a lender misrepresents or doesn’t ensure a borrower understands payments will escalate over time. The Federal Trade Commission warns consumers to avoid car title loans, as they’re typically short-term loans that come with a triple-digit annual percentage rate (APR). Because the loans require borrowers to hand over the title to their automobile as collateral, you risk losing a much-needed possession.

Predatory student loans often feature excessively high interest rates. The current interest rate on a federal student loan ranges between 4.32% and 7.08%, so be careful if you spot a much higher rate. Student loans that have prepayment penalties or require a car or home as collateral might also be considered predatory.

Be on the lookout for automobile dealers who load up a loan with extra “junk” fees, like for service contracts, rustproofing and theft deterrents. Also look for loans that dealers finance in-house; they may come with an APR that’s far higher than what a bank or credit union might offer.

To get out of a predatory loan, try refinancing the loan with a reputable lender. Credit counselors, often working for free, may be able to help too; you could start by contacting the nonprofit Legal Services Corporation, or HUD, if you need housing help. In addition, the aforementioned NFCC says it will work with clients regardless of their financial situation; according to the organization’s website, “we don’t turn anyone away.”

If you think you’ve been a victim of predatory lending, report it to the Federal Trade Commission or to your state attorney general’s office. If the predatory lending involves a local home improvement contractor, contact the Better Business Bureau for guidance.

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