Filed under: LoansBy Geoff Williams
Loans are inevitable for most adults. If you buy a house or car, use a credit card or go to college, you'll likely need to take out a loan. U.S. household debt stands at $11.7 trillion, according to a recent Federal Reserve Bank of New York survey that draws on information from 40 million individuals.
But taking out a loan doesn't always work out well, as anyone who has dealt with a debt collector can attest. So what mistakes are you most likely to make in the loan process? A good rule of thumb: If there's a chance your loan can destroy your marriage, business or send you into bankruptcy, you're about to make the biggest mistake of all: taking out the loan in the first place.
1. Not Reading the Fine Print
There are always important gems of information buried in all that legalese, so you owe it to yourself to take a good look at what you're signing up for, says Leslie Tayne, a financial attorney and debt specialist who runs the Tayne Law Group in New York City.
"Many people have a tendency to simply sign the dotted line, listening to the salesperson and not double-checking the agreement," Tayne says. "I see this all the time. A client will come in and tell me that they didn't know about something in the loan, such as a balloon payment or increase in interest rate." But if you sign the contract, you're telling the lender that you do know -- even if you don't -- which, of course, is the problem.
2. Taking Out a Loan for Someone Else
Co-signing is a mistake, but some people double that error by taking out a loan and giving the money to someone else. "You'd be surprised at how often this happens," says Michael Poulos, CEO of Michigan First Credit Union in Lathrup Village, Michigan. He says his staff has, on occasion, encountered loan scenarios such as parents coming in to borrow money for their children and customers needing money to bail out family members from jail.
One of the more interesting cautionary tales about borrowing money for someone else came from a man who financed a loan to buy his girlfriend her own set of wheels. "But then his wife found out about the car," Poulos says. The man then decided he didn't want to pay for the vehicle, and the girlfriend broke up with him. The car was repossessed, and the man's credit score took a plunge.
3. Not Thinking About the Long Term
This new loan will probably be a big part of your budget for quite a while. So buddy up to those terms and get well acquainted with that loan before you commit.
"Applying for a loan, like any contract, means entering into a relationship. We actually call the members of our lending team 'relationship managers' because in any good relationship, there is honest communication and discussion," says Marty Gallagher, executive vice president and chief credit officer at Beneficial Bank (BNCL), headquartered in Philadelphia. "This is a process we're entering together, and we want to make sure there is a healthy conversation about goals so we can find a way to accomplish them responsibly."
Gallagher is right. The more desperate you are for the loan -- i.e., you're shoring up money to pay for surgery or your car is kaput and you need a replacement ASAP -- the more you should know how this loan will affect your month-to-month living expenses. The last thing you need to do is solve a problem and create another one.
4. Letting Emotions Fuel Your Borrowing Desires
Poulos says this is a classic error, and it dovetails with consumers not thinking about the long term. "People will find themselves in a crisis, or they'll become passionate about something, and they'll want a loan to fix everything. We've had customers take out a $1,000 loan so they can hire a limo and get a hotel room for a date, not thinking about the fact that they'll be paying for this amazing night for the next 12 months," Poulos says.
He says the bank staff has had people request loans for plastic surgery. They've even had people calling from a casino floor to take out a loan. That consumers do this may not be surprising, but that they admit it to the teller or bank manager might be. Then again, this is the era of oversharing. "You'd be surprised what they tell you," Poulos says.
5. Bungling the Paperwork
Errors in requesting loans are common. "One of the biggest mistakes we see is a lack of preparation," Gallagher says. "Some think that a loan is a simple form -- a quick application you can fill out when you're out running errands." True, Gallagher says the bank staff will help consumers so mistakes are minimized. But these professionals still depend on consumers to be focused enough that they read the paperwork.
When it comes to home loans, Melissa Cohn, president of GuardHill Financial, a residential mortgage company in Manhattan, says sometimes a married consumer will change her name -- but not legally. The bank, Internal Revenue Service and your driver's license may have one name while your Social Security card displays another. That can cause problems.
But it all works out in the end, right? Actually, the borrower can be turned away, but that's rare. "Ninety-nine percent of the time, a resolution is found the same day, but those eight-hour closings are rough," Cohn says.
"The No. 1 issue we see are incomplete applications," says Rob Beall, senior lending officer with Private Bank of Decatur in Decatur, Georgia. "The more information the lender gets, the more he or she can assist the applicant."
White lies are known for not hurting anyone, but in this case, they can hurt the borrower. "I see this happening a lot," Tayne says. "This goes back to the days of stated income where people would just say what they made but did not have to show proof, so often the income was overstated. In other cases, I see people not disclosing all of the debts they actually owe when completing loan applications."
Tayne has even seen borrowers use another family member's Social Security number without the other person knowing. "This eventually catches up to them and most often, where spouses are concerned, ends in divorce cases," she says.