Growing numbers of aggressive, dishonest lenders advertise their services to people in financial need - people who may have fallen behind on property taxes, or need money for medical bills, or face costly home repairs. Instead of offering a fair loan, these lenders use smooth-talking salespersons, high interest rates, outrageous fees, and unaffordable repayment terms. Homeowners can be tricked into taking out loans that they cannot afford to repay. Some homeowners may lose their homes to foreclosure.

What You Should Know

Be cautious. Be suspicious of anyone who offers you "bargain loans," whether they send you an offer, call you on the phone, or come to your door. Don't rely on salespeople who promise easy credit. A bad loan can be a very costly mistake. Beware of offers that are only "good for a very short time." Be suspicious of anyone who contacts you first -- most good mortgage lenders or credit companies don't solicit business over the phone or just show up on your doorstep unannounced.

Slow Down! Never act quickly. Avoid lenders who call and promise guaranteed, low-interest loans, who take applications over the phone, or who offer next-day approval if you pay them some money today. Say "No" to lenders who ask for up-front fees "to cover the first payment and other expenses." You may never receive the loan.

Shop around. If you need a loan, start by contacting local financial institutions. See if you are eligible for a loan from a local bank, credit union, or mortgage company. Whether you borrow for home repairs, medical expenses, or debt consolidation, compare total costs of the loan as well as interest rates. Understand the points and fees. A loan with a lower monthly payment is not always the better deal; it may have a high balloon payment that is due in a few years. Use the phone to check out lenders. Ask the lender for names of other customers and call them to see if they are satisfied. Check with your local Better Business Bureau or state attorney general and ask if there have been complaints against any company you are considering. Ask how to find local housing counseling agencies.

Avoid "balloon" payments. One way that lenders make loans sound very attractive is to make the monthly payment small but require a big balloon payment at the end of the loan period. Some loans have you wait to repay the entire loan amount until end of the loan term. Lenders may promise to help you refinance when it comes time to pay it off, but watch out! This promise may be just a way for the lender to charge you higher fees and closing costs. Predatory lenders make money by charging excessive fees every time they refinance the loan.

Ask questions. Before borrowing money, know exactly what the lender is offering. You have a legal right to know the total cost of the loan, the annual percentage rate, the monthly payments, and how long you have to pay back the loan. Always ask questions until you understand everything. Have all fees and points explained. It is important to know more than the monthly payment. Recognize that credit insurance only protects the lender, not you.

Read carefully before you sign. Whenever you borrow money, don't sign anything you don't fully understand. Always assume that any paper you sign is a contract. You can insist on changing anything in a contract that you don't like or can't agree to. If the lender won't change the contract to your satisfaction, get a loan somewhere else. Before you sign the loan papers, ask a lawyer or trusted friend to go over them with you. Don't sign a document with blank spaces; all spaces should be filled in before you sign.

You can change your mind. You can back out of getting a loan any time before you sign. If a new development surprises you, delay or stop the process. If you've already signed a contract that uses your home as security, the Truth in Lending Act allows you to change your mind, for any reason, within three business days of signing the contract. Think carefully before you sign, and remember: you have a little time to change your mind.

THINK ABOUT A REVERSE MORTGAGE.
If the homeowners are 62 or older, a reverse mortgage may be better than getting a home equity loan. A reverse mortgage gives you money that you don't have repay until you move, sell the house, or die. You choose to get the money as a lump sum payment, a monthly income, or a combination of both. If you get a reverse mortgage, you can't lose your house to foreclosure the way you could with a home equity loan. A reverse mortgage does use the equity in your home, so consider your options carefully.

Get help if you think you have an unfair loan. Contact your county office of consumer affairs or your state Attorney General's office. You can find their numbers in the blue (government) pages of your phone book. If you are a victim of bad loans, let others know. You can help stop predatory lenders from victimizing someone else. Report the fraud to the Federal Trade Commission.