BBB Tip: Looking for a loan? Know your rights.

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Borrowing money in order to buy homes, finance home improvements, pay medical expenses, or cover other personal needs can be stressful. Before going to the bank or clicking on an online ad to borrow money, be sure to understand your rights as a borrower. BBB recommends that you protect yourself and your property by knowing the facts and doing your homework.

Prime, subprime and predatory lending

The marketplace for home loans, both mortgages and home equity loans, has different categories of loans based on the applicant's credit history. The two main groups are called prime and subprime loans.

• Prime loans are loans given at the lowest interest rates and costs to the consumer. They are generally given to consumers who present the lowest risk of default to the lender and generally have the best credit history and credit rating.
• Subprime loans are more expensive loans given to consumers with flaws in their credit history or, sometimes, no credit history. If your financial history shows other loans or financial obligations that you have not repaid, you may need to pay more (either in interest, fees, or both) in order to borrow money. While more expensive, subprime loans provide access to credit for consumers who do not qualify for prime loans.
• Predatory lending is a set of lending practices that takes unfair advantage of consumers who end up taking out loans that they cannot afford. It may ultimately lead to the loss of the home. Most predatory loans occur in the subprime market, but not all subprime lending is predatory.

 

Getting a Loan

Before taking on a large debt like a first or second mortgage, take the time to investigate the lending market, your credit history and rating, and compare several lenders and programs. These simple steps can save you thousands of dollars and protect you from predatory practices.

1. Assess your needs: First, determine your primary financial need. Do you need money to buy a home, make home improvements, consolidate debts, or find additional cash for personal needs? Depending on your needs, different loan programs and services are available. Next, determine how much money you need to borrow. Be wary of lenders who push you to take out a larger loan than you need.
   
   
2. Assess your financial status: There are two critical elements to your current financial situation. First, determine how much cash you have available for a down payment or other fees. Next, look at your credit history so that you can understand what a lender will see. Check your credit report and credit score from any of the three major credit reporting agencies, Equifax, Experian, or TransUnion. By reviewing your own credit history, you can better determine if you might qualify for a prime loan. You should also correct any errors you discover in your credit reports before applying for loans.
   
   
3. Finding the loan: You will need to research and compare to find the best loan. If you are purchasing a home, the real estate broker who helped find the property may recommend sources or assistance in finding a loan. A mortgage broker, mortgage shopping website or community group can help in this process as well. Research all of the options available and have a clear understanding of the payment plans and interest rates that are offered.
   
   
4. Document review: The mortgage broker or lender will draw up documentation for the loan. Before signing, make sure you understand the documents, including the amount and number of monthly payments required, the fees being charged, and whether there are any penalties if you want to repay the loan early. An attorney or trusted advisor can assist with this process. Remember, if you have a question or are unsure of something, don't be afraid to ask!

 

Small Business Resources

Small businesses should also be aware of similar situations when researching refinancing a loan or looking for extra lines of credit.

• Overextending promises such as high dollar loans within 24 hours or switching out a merchant card processing service with higher fees are just two tactics.
• Prepayment terms. Often, these loans have a prepayment loan penalty equal to the sum of the remaining payments. Even if the business owner successfully pays off the interest and fees early, they end up paying more than what the loan was worth.

 

Instead of making a quick decision when times seem a little uncertain, do a business analysis to assess cash flow, debt and assets. See if it really is the right time to apply for a loan to expand business, realign debt, or weather a rocky situation. 

The United States Small Business Administration recently announced it would work directly with state governors to provide low-interest loans to small businesses and non-profits severely impacted by the coronavirus. The SBA's Economic Injury Disaster Loan program provides small businesses with working capital loans of up to $2 million that can provide vital economic support to overcome the temporary loss of revenue.

SBA's loan resources.

To find a lender, visit BBB.org and search by business name or category.