Legal Protection Of Borrowers

Like millions of Americans, you probably make at least some of your purchases on credit. The practice of buying now and paying later, though vital to both individual and national economies, can be dangerous if abused. Each year hundreds of thousands of people find themselves over their heads in debt and unable to meet all their monthly payments. Often they resort to desperate means — trying, for example, to consolidate their debts by incurring a single new one, a tactic that sometimes makes matters worse. In some cases they wind up in bankruptcy court, their credit ratings shattered and their property forfeit.

Neither federal nor state governments can prevent people from overextending themselves financially, but the governments can, and do, provide consumers with some protection in the credit marketplace. Because banks are the primary source of credit, they come under particularly close scrutiny.

There was a time, not too long ago, when a bank could turn down a credit applicant for any reason, or for no reason at all. A person might be denied a loan on the basis of sex, race, marital status or just because the loan officer took a dislike to the applicant. Similarly, banks and other lending institutions could conceal the true interest they were charging for loans by stressing the monthly rate and obscuring the total yearly cost. Credit reporting agencies, upon which lenders depend for determining the credit-worthiness of an applicant, were so loosely governed that they could report mere rumors as evidence of a person’s lack of financial responsibility. All such practices, and a host of other dubious credit procedures, have been outlawed.

Bank Loan Cosigning Perils

There may come a time when a friend or relative applies for a loan and the lending institution refuses unless the applicant can find a cosigner. If someone you know asks you to cosign a loan, consider the request very carefully before you agree.

Chances are that the lender would not have required a cosigner if the applicant’s credit rating was good. If you do cosign, you are not simply doing your friend a favor; you are agreeing to pay off the loan in full in the event that your friend cannot.

In fact, if you are accepted as a cosigner, the lender may be more persistent in dunning you for repayment than in pursuing the borrower, on the assumption that your financial resources are greater. As a cosigner, you have few rights but possibly crushing obligations — and all this without having received a penny from anyone.

How To Successfully Qualify For A Bank Loan?

Before applying for any kind of loan, it is prudent to analyze just how much money you need and precisely how long you need it for. Then compare the rates and conditions you will have to abide by for the use of someone else’s cash.

Financial institutions offer many types of loans under many different names. In addition to auto loans and home mortgages, there are, for example, home improvement loans, used for financing repairs, remodeling, additions or other improvements to a house; small business loans, made to individuals who own their own companies to finance operations or buy new equipment; special short-term loans for a variety of purposes; “demand loans” or “time notes” that can be used to tide a person over a number of months or until a specified date when expected funds will have come in and the loan can be paid in full; “swing” or “bridge” loans to enable a house buyer to close on the contract for a new home while waiting for the money due on the purchase of his or her old one.

In all loans — particularly the most common ones, “consumer” or “personal” loans that are ordinarily paid back in monthly installments — bankers are mainly interested in two things: the purpose of the loan and the borrower’s ability to repay it. They are usually less willing to lend $5,000 for an extended vacation in Europe than to lend the same amount for the payment of medical bills or the installation of a brand new heating system for the home.

As a practical matter, a loan officer may have a hard time knowing what the money actually went for; your ability to repay is the primary concern. Though the figures vary, most banks do not like to lend you a sum that exceeds 20 or 25 percent of your gross income — $6,000 to $7,500 on a salary of $30,000, for example — or an amount that would make your total monthly payments larger than a week’s salary, including your debts (and in the case of mortgages, including payments towards taxes and insurance on your home). But, again, banks don’t make a fetish of verifying people’s stated incomes. They are likely to pursue the matter in detail only if the loan is for a large amount and the collateral or security interest is inadequate or shaky. Moreover, if they have any misgivings about you, they can scrutinize your credit history to see how well you have handled credit in the past.