There are plenty of loans available to consumers today with fair, good or excellent credit. Credit cards are easy to obtain and personal loans help cover large vacations or home improvements. But occasionally we start to get carried away with spending and use loans to help dig ourselves out. Unfortunately, this method is often more damaging than people realize.

Overspending
Easy credit often means easy spending. Why wait to save up for something when you can buy it now and pay for it later? Consumers buy and rack up balances on credit cards. Even more conservative consumers can get in trouble with medical bills or student loans.

As the debt piles up, the consumer tries to fix it. Credit cards offer low or no interest for certain periods of time, so you open one and transfer your balance. Now you can really start paying off some debt! But you can’t clean it up in time and the introductory rate runs out. Now all of the finance charges you were avoiding come barreling back at you, but often with twice the interest rate of your last card. Your same payment does nothing but pay off the interest that accumulates every month. (more…)

The last few years have been great for homebuyers. Banks seemed to be dying to offer us home loans and the Fed kept interest rates conveniently low. House prices were going up and everyone wanted in on the joys of home ownership. Now, however, the overenthusiastic banks are starting to pay the price.

Subprime Lending
There are two areas of the mortgage market – prime and sub prime. The prime market includes the average and above average citizens and companies who pay their bills on time, make plenty of money and are an overall great banking customer. There is virtually no risk in giving loans to individuals in the prime market. They are an excellent gamble.

The subprime market is a much more exciting gamble as it doesn’t always pay off. Subprime lending is a practice of offering loans and mortgages to candidates who would normally not qualify for the money. Subprime borrowers might have declared bankruptcy in the past, have low credit scores, have foreclosures or a history of untimely payments.

Often these borrowers clean up their act for a time under the guidance of a credit counselor, apply for and receive a subprime mortgage. Of course the corresponding interest rate and fees may be considerably higher than a standard mortgage as the bank must mitigate its risk. The subprime market is huge and there is a great deal of money to be made for banks willing to take the gamble. (more…)