Dangerous Debt
Don’t get trapped

We’ve all heard the radio and TV ads that go something like this:

“Reduce your mortgage payment by up to 45 percent. Save hundreds of dollars a month.”

Even the most cynical listener would want to know how to save so much money each month. The ad usually goes on to talk about refinancing, and what you needed to do. Finally the punch line arrives: “Once you’ve refinanced, you only make interest payments on the family mortgage.”

What the ad doesn’t mention is that your mortgage principal balance never goes down. You could be making interest payments for the rest of your life and never reduce the balance of your mortgage. Years later you would still owe the same amount.
           
Predatory tactics
More and more vulnerable borrowers: folks with poor credit, elders, low-income families, and recent immigrants fall prey to a variety of lending practices collectively known as “predatory lending.” The term refers to practices that may include deception, outright fraud, and manipulation that mortgage brokers or other lenders may use to make a loan with terms disadvantageous to the borrower.

Predatory practices may include offers for refinanced mortgages, payday loans, cash advances on credit cards, debt consolidation loans, tax refund anticipation loans, and overdraft loans, among others.

Many residents are surprised to learn that New Hampshire has no specific statutory limits on how much interest can be charged on credit card balances or any other type of debt. Interest rates are not regulated by federal law either. New Hampshire retailers and lending institutions may charge interest rates as high as 400 percent on a consumer debt. All that is required by federal and state laws is that information about the interest rate be provided to the borrower.

“Flipping”
One common predatory lending practices is known as “flipping” , or “repeated financing.” The carrot for the consumer: a reduction in monthly payments, similar to the ad described above. What the lenders don’t tell you is that you will end up paying more over a longer period of time The lender gets all the benefits and the consumer often ends up owing more money
           
Up-front credit insurance
Another predatory lending practice involves bundling a loan with additional products. One that has proved very costly for consumers is the practice of bundling up-front, lump-sum credit insurance with a loan. If you ever chose to refinance the loan, you in essence will also refinance the insurance, and if your next lender also bundles up-front insurance, you end up financing and paying the new lump-sum insurance coverage. This can add thousands of dollars to each loan. It makes more sense to purchase a separate "credit life" policy, paid in installments throughout the life of your loan, which will pay the balance on your loan to your lender if you should die.

Car title loans
Similar to payday loans, car title loans are marketed as small emergency loans. A typical car title loan has a triple-digit annual interest rate, requires repayment within one month, and is made for much less than the value of the car. Title loans are typically made without regard to borrowers' ability to repay. Because the loans are structured to be repaid as a single balloon payment after a very short term, borrowers frequently can’t pay the full amount due on the maturity date and instead find themselves extending or “rolling over” the loan repeatedly. In this way, many borrowers pay fees well in excess of the amount they originally borrowed.

If you fail to keep up with these recurring payments, the lender may repossess your car—an essential asset to most working families, and often a family’s only means of transportation.

 In NH, where the interest rates for car title loans range as high as 366 percent, the original term is one month or less, and the car title is used to secure the loan. This means if the loan is not repaid, the lender may take the car and sell it to get the loan money back. You risk losing a valuable family asset and perhaps your only means of transportation.

Empower yourself!
As a consumer you need to be aware of high-pressure sales tactics, high interest rates, balloon payments (low monthly payments with a big payment due at the end of the loan), and promises to refinance the loan at a lower interest rate in the future.

To avoid falling prey to predatory lending practices, the American Banking Institute suggests asking yourself these questions before you borrow:

• Do I feel pressured?
• Have I shopped around for the best deal?
• Is it too good to be true?
• Can I trust the lender?
• Do I understand the loan terms?

The federal Department of Housing and Urban Development publishes a fact sheet of tips to help you avoid predatory lenders. Among them:

• Before you buy a home, attend a homeownership education program. Non-profit housing agencies such as the Concord Area Trust for Community Housing (CATCH) in Concord, and Affordable Housing, Education, And Development (AHEAD) in Littleton offer classes throughout their service areas.
• Hire a properly licensed inspector who will not over-estimate the value of your home, thereby making you eligible for a loan for more than your house is worth.
• Don’t make false statements on your loan application.
• Don’t let anyone convince you to `borrow more money than you can afford to repay. If you get behind on your payments you could lose your home.

           
Don’t get crushed by debt: Cooperative Extension offers money management programs
The best way to avoid getting into trouble with debt: empower yourself. UNH Cooperative Extension offers several money management programs and workshops designed to increase consumer financial skills and confidence, including a new one-hour workshop, Don’t Get Crushed By Debt.

We also offer Credit Check Up, Making Money Work For You and Taking Charge of Your Finances, among others. For more information, go to our Managing Money web page Check for upcoming classes on our Family and Consumer Resources Event Calendar.

Extension Family Resource Management specialist Suzann Enzian Knight and program assistant Katherine Fredette provided information for this article. Family and Consumer Resources educator Deb Maes developed the article’s original structure.

For more information

• Don’t Borrow Trouble® New Hampshire New Hampshire Housing authority’s Program to help prevent predatory lending across the state.

• Predatory Lending in New Hampshire Learn More, file complaints.

• Center for Responsible Lending A wealth of online resources to help you protect yourself from predatory lending practices.

• HUD-Approved Nonprofit Consumer Counseling Services in New Hampshire When you need help with consumer debt.

• Subprime and Predatory Lending in Rural America: Mortgage lending practices that can trap low-income rural people Recent report from the UNH Carsey Institute.
  
  
• US Department of Housing and Urban Development: Don’t be a Victim of Loan Fraud

• Credit: Truth-in-Lending US Department of Justice fact sheet provides a brief summary of the federal Truth-in-Lending Act (TILA), information on relevant state and federal statutes. Discusses balloon payments, payday lending, credit card scams and more.