Have you ever wondered how the rabbit turns up from the magician’s hat? Or how the goldfish got in his mouth in the first place? How is it possible that he knows the card you pulled from the deck? These tricks and various others that had you enthralled as a child (or adult) are, believe it or not, doing the rounds in the mortgage and lending world. Only here, they’re not tricks you can applaud.
You think you’re on the verge of closing a loan application when bam, the lender pulls out a hidden charge from his hat of costs. You’re sure you have the interest rate locked in, but then the statement “I hate to say this, but the markets have moved and you owe a higher percent” comes like a bolt from the blue from the lender’s mouth. You believe you have a deal that’s too good to be true, and well, the lender pulls a few tricks from his sleeve, and you find out that it really is too good to be true.
Doing business with lenders and credit card issuers is often a dirty job; you’ll find that you have the wool pulled over your eyes more often than not, and end up paying for one lapse in judgment the rest of your life. You may not exactly be naﶥ, but it helps if you know the tricks of the trade and the fast ones they pull, so that you can see them coming and sidestep your way out of the debt trap. So here goes — 17 different ways to dodge the hidden tricks that lenders use.
1. Beware the concealed costs: In a demonstration of how to sell a pair of spectacles for the highest price, an oculist taught his apprentice the art of salesmanship. When a customer asks for the rate, quote a sum and watch his reaction, he instructed. If he doesn’t bat an eyelid, add “For the frame, the lens will cost you $X extra.” And if he still does not show indignation or surprise, say “For one. Both will cost you twice that much.”
That’s how most lenders do business — they hit you with hidden costs that go by the varied terms administrative, processing, origination, documentation, underwriting, arrangement, and miscellaneous fees. And they do it when you’re close to closing, and cannot turn around and walk away without losing much more in the bargain.
You can protect yourself by demanding a list of the fees associated with the loan upfront Lock everything in writing. Ask for a Good Faith Estimate (GFE). If your lender is trustworthy, he will provide you with one even before you apply for the loan; though by law, he is only required to do so three days after you apply. If you know the cost of the loan, you can shop around for the best available rates.
2. Closing cost issues: Most lenders entice loan prospects with very low closing cost estimates. In what is called the “low-ball” trick, lenders quote a ridiculously low closing cost in order to rope in customers, who are then trapped just before the actual closing with no way to back out that late in the deal. With the closing statement being delivered to the customer a day before the settlement, they are forced to pay the amount charged by the lender, or risk forfeiting the property.
Closing costs — expenses incurred over the actual price of the home — usually tend to oscillate between 3 and 5 percent of the loan amount. Typically, the following items tend to find place on your GFE - loan origination, discount and application fees, points, lender’s and buyer’s attorney fees, appraisal fee, credit report, lender’s inspection fee, mortgage broker commission, tax service fee, processing fee, underwriting fee, wire transfer fee, interest from the day of settlement to the date of your first mortgage payment, private mortgage insurance premiums to protect your lender, property taxes from the day of settlement to the end of the tax year, hazard insurance premiums, settlement or closing fee, document preparation fee, notary fee, title search and title insurance for your lender, title insurance for you, recording fees, and tax stamps. You can ascertain the exact amount and even bargain with your lender before you decide on taking the loan from him.
3. Locks on the interest rate: With the markets fluctuating on a daily basis, most lenders lock in interest rates on the day the loan application is made. If the rates have increased at the time of closure, then as a customer, you have saved yourself some money. If not, the pendulum swings the other way and the lender makes a profit. Some unscrupulous lenders make sure they gain either way — if the rates drop, they inform their customers that the rates are locked in, if they rise, they tell them that there’s been some mistake, and that the rates were not locked after all.
The best way to avoid being taken by this scam is to monitor market rates yourself from more than one source and know if they have increased or not at the time you close the loan.
4. Rates that float: When a borrower opts to let the interest rate float, that is, they don’t lock it down to a particular rate but let it fluctuate according to the way the market swings, the lender sometimes tends to raise the rate by more than what’s agreeable according to market conditions. Even if you realize there’s an anomaly, at times it’s too late to get out of the deal.
Anticipate that your lender will try to pull a fast one and get him to agree in advance, in writing, that you get the same rate offered to new customers on the date your rate is fixed.
5. Paying on time may not pay: Your loan may come with a variety of discounts that apply as long as you make your payments on time. Though this sounds like a good thing, there’s the danger of delaying even one payment. There are lenders who are merciless in not excusing payments that are just a day late — and that’s when your discounts come to nothing.
Before you choose loans which offer discounts for on-time payments, make sure there is a grace period allowed for the rare times you are not able to pay on time.
6. Check those online offers: There are loans that offer discounts and benefits only if you apply through the internet, and if you agree to correspond only through email. These come with the caveats that the benefits are revoked in case you ever change your email address without notifying the lender or if mail sent bounces twice within the span of 48 hours.
Make sure of all the hidden conditions before signing on the dotted line for such loans. With the uncertainty of email and the threat of malware, these loans are best avoided altogether.
7. Automatic monthly payments: Some lenders and borrowers find it mutually advantageous to set up automatic payments every month — the borrowers are happy they are not saddled with late fees when they inadvertently forget or delay payments, and the lenders are satisfied that they will receive payment regularly every month. Some lenders even offer benefits for automatic debits. The problem arises when there’s a stipulation that the borrower has to set up an Automatic Clearing House (ACH) within 30 days of signing the application. If the ACH does not go through in the said time, the customer is liable to lose the discounts even before the first bill comes.
To avoid this mess, follow up with the lender to get the ACH while the application is being processed.
8. Reports to credit bureaus: With the massive role that credit bureaus play in securing loans and mortgages in the United States, it pays not to get on their bad side. But no matter how hard you try to stay within your spending limits, no matter how prompt you are in your payments, no matter how good a credit risk you are, there are some credit card issuers who can play havoc with your credit report by providing misleading information. While some don’t report your on-time payments, there are others that don’t report your credit limit. This affects your credit utilization — if your limit is $500 and you spend $100, your utilization is 20 percent; but if your limit is not known to the credit bureaus, and you spend $100, they assume you’re spending 100 percent of your limit, which does not look good on your report.
Make sure your card issuer is reporting your limit. If not, ask that they do so. If this doesn’t work, switch providers.
9. Watch those late payments: While most lenders are happy to offer borrowers a grace period to make their payments, there are a few just waiting to pounce like vultures the moment you forget to make one payment on time. They not only report you to the credit bureaus immediately, but also hike your interest rate. When you protest, they show you that fine print in your agreement that allows them to do so.
Avoid such sticky situations by not carrying balances to the following month. If you are absent-minded, set up an automatic debit so that you can rest assured your payments will be made on time.
10. More cards, more debt: Most card companies play safe by setting low limits on cards issued to risky customers with bad reports. The devious ones though, play the devil and issue multiple cards, each with low spending limits on them. In addition to having more money that is not theirs to spend — thus putting them deeper in debt — these customers are also left holding more due dates to remember and more penalties and bad credit reports if they mess up.
The safest way out of this situation is to stick to your limit on one card. In extreme circumstances you can ask your issuer to increase your limit on the card you already have, instead of issuing you another card with a low limit.
11. Interesting balance transfers: Stay alert when you’re transferring your balance from one credit card company to another. The card company that’s taking over your account pays the amount due to your old issuer. If payment is made through a check, there’s a period between the time the check is handed over and the time it is actually cleared. This gap may provide an opportunity for both your old issuer and your new one to charge you interest.
Examine both card companies check transfer policies and make sure you’re not being duped. Some card companies wait for the check to clear before they start charging interest while others prefer electronic transfers. Either way, make sure you are not left holding both ends of the bill.
12. The preposterous penalty: If you read between the lines in your Truth of Lending statement, you’re likely to come across what’s known as the “Prepayment Penalty.” This, in simpler terms, means that if you pay back the entire loan or a large amount of the principal before a stipulated time, you have to pay the lender a penalty. While the borrower is looking to pay off the loan with the minimum interest, lenders justify this penalty with the reason that they need to collect a minimum interest amount if they are to emerge profitable from the deal.
If your loan includes a prepayment penalty, and if you are relatively confident that you are going to pay the entire sum in a short time, shop around for others that do not include this clause.
13. The negative amortization trap: No-cost, low-payment loans are dangerous — they could end up costing you much more than the normal interest amount. Loans that are advertised as low-payment may end up becoming negative amortizing loans that seem advantageous to borrowers because they have to pay a very low sum every month. In reality, the interest they are not paying is accrued to the principal of the loan, thus raising the interest the borrower has to pay the following month. This compounding effect can lead to disastrous consequences when the borrower wakes up to the fact that he’s been duped.
If it’s too good to be true, it probably is — stay away from such loans.
14. Use more or pay more: More and more credit card companies are now penalizing their customers for not using their cards on a regular basis. Most people hold more than one card, but use only one or two while saving the rest for a rainy day. The card companies hike the interest rates on the cards not used in a while, and conveniently forget to inform customers about the increase - which means they are in for a rude shock when they do actually charge expenses to those cards and are presented with the bill at the end of the month. They’re left in the unenviable position of either paying up or ending up with a bad credit report.
Where possible avoid using credit cards. If you must use them, stick to one or two and keep checking with your issuer on the interest rates.
15. Debt can hurt you in more ways than one: A survey in 2005 by Consumer Action found that applying for a mortgage, enquiring about a car loan, or even thinking about getting a new credit card is enough reason for your credit card issuer to raise the interest on your card on the grounds that your overall debt has increased.
Make sure your issuer informs you about any potential increase so you can opt out if you wish.
16. Hidden agenda behind hiking minimum payments: A 2003 banking regulation has mandated credit card companies to raise the minimum payment due every month. While this seems to be a good long-term plan to bring down the overall debt of the average consumer, there are those who feel that the issuers will come up with new fees to recoup the losses they suffer.
Clear the air with your credit card company when you apply for a card so that there are no nasty surprises in the form of fees or increased minimums sprung on you.
17. Piracy across the seas: Ever used your credit card abroad and found that you were presented with an enormous bill on your return home? Card issuers often charge you foreign exchange transaction fees for any purchase you make overseas. There are some cards that allow you to deal in U.S. dollars, but that does not mean the exchange fees have been waived altogether. Even though you have not actually exchanged any currency, you are slapped with a “3 percent of the U.S dollar amount of the transaction, whether originally made in U.S. dollars or converted from a foreign currency.” Yes, that’s an existing clause in Chase/Bank One’s term sheet.
Find out from your bank what charges you will incur before going abroad, whether you spend in dollars or in any other currency.
There are other common sense measures you can take to steer clear of sleazy lenders.
- Shop around before you make your choice.
- Never sign blank forms.
- Do not provide your Social Security number before you actually need to apply.
- Do not sign contracts that demand the payment of an origination fee even if the loan is not closed.
- Deal with lenders who are upfront about the loan’s wholesale price and markup, and will give you the necessary information in writing.
By following this simple guide, you can be sure you won’t be finagled by lenders.
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