Creditor or predator: How to tell the difference

MEXICO, Mo. – If you need a loan, payday loans and pawnshops should be your last choice, says a University of Missouri Extension family financial education specialist.

Payday loans are a black hole that can suck borrowers into a lifetime of debt, says Virgil Woolridge. Other credit options that might seem fine but aren’t include rent-to-own contracts, subprime mortgages, tax refund anticipation loans, overdraft protection and car title loans.

The lender may seem to make it easy for you by offering low monthly payments and giving you money when no one else will, but buyer beware. If it’s too good to be true, it probably is, Woolridge says.

People in lower income brackets often feel that they have no other option than payday loans, he says, but always seek traditional financing sources first, including friends and relatives.

And if you do take out a payday loan, make sure there is no prepayment penalty and pay it off early.

Here are some red flags to look for when borrowing:

• You feel pressured.

• You don’t understand the questions or terms the lender uses.

• You get approved for more money than you wanted.

• You feel you can’t make the payments.

• You learn about more costs in the loan or rental papers.

• The lender requires you to buy credit insurance.

• The note is a balloon note, in which you must pay everything in one lump sum rather than in smaller payments.

• You cannot pay the loan off early without paying a penalty.

• The interest rate is very high. Comparison shop with at least three lenders before you sign.

• The lender asks you to sign papers that he or she will finish later. Don’t ever sign blank papers.

• You receive phone calls or letters offering you a loan. You did not ask for a loan.

You should know these things before signing any paperwork:

• What fees must be paid up front?

• How long does it take to get money?

• What is the total amount you will pay for this loan? How much interest will you pay over the life of the loan? Does the interest rate stay the same?

• What are the late fees?

• Is there a lump sum or balloon payment at the end of the loan?

• What agency regulates the lender?

• Where do you make the payments and how much are they?

When dealing with pawnshops, ask how much they charge for insuring and storing the items being pawned. Ask if there are other fees besides interest.

Any reputable, honest lender should be happy to answer your questions, Woolridge says. “Their hesitancy to do so is a red flag.”

Woolridge recommends the following websites for more information:

• Feature articles, answers to frequently asked questions and other resources from MU Extension, missourifamilies.org/money.

• Center for Responsible Lending, responsiblelending.org.

• Freddie Mac’s “Practices for Avoiding Predatory Lending,” www.freddiemac.com/learn/pdfs/uw/Pred_practices.pdf.

• Home Loan Learning Center, homeloanlearningcenter.com.