If you are about to take out a loan, you have likely heard the advice to read the fine print before taking out the loan. Yet what does that mean besides literally reading it? What pitfalls could be in that fine print? There are many financial products that contain clauses within that are not exactly consumer friendly. I will outline some of the most common fine print catch 22’s and I Gotcha clauses. If you find any of these provisions in the fine print, you should consider another financial product or lender.
Lenders are in the business to make money, and to do that they count on you paying off your loan over the entire length of the loan terms. However if you somehow pay the loan off early, they will not get as much profit from your loan. To counter this some lenders have in the fine print a prepayment penalty should you repay the loan before the loan is due. Most often this penalty is a percentage of whatever balance you paid off to soon. This can also effect your abilty to refinance the loan should you run into financial difficulties. If you can at all avoid a loan with prepayment penalties, do so, they never work in your favor and could harm you financially, such as if you need to refinance or if you find a lower interest rate.
Many lenders make loans seem very attractive with low monthly payments. These monthly payments may seem to good to be true, because they are. These lenders use what is called a balloon payment at the end of the loan. This means your last payment will be huge, often times you cannot repay it. Lenders use this trick with secured loans so that at the end of the loan they can take possession of your collateral if you fail to make the balloon payment. While many states outlaw balloon payments, it is legal in some states, so beware and look for any balloon payments in the fine print. If you discover the financial product has a balloon payment, you would do best looking elsewhere for a loan.
Lenders often sell this as an ad on for your loan. In most cases it is a rip off, resulting in nothing more than inflated monthly payments and a higher APR for your loan. If you think its required to get a loan, it is not, the only exception being for physical property. This insurance often costs a lot of money and often has many exclusions making these polices often useless for those who want the coverage.
Pyramiding Late Fees
While nearly every lender charges late fees if you miss a payment, pyramiding late fees are largely illegal in most states. Pyramiding late fees occur when the lender charges you a late fee, and when you don’t pay it by a certain date they apply your regular payment first to the late fee, and then to partially cover the payment due. This results in another late fee and a cycle that often repeats itself. The problem here is the lender never tells the borrower what is going on, and the borrower is always slightly behind due to a new late fee being tacked on every month.