You have to look more carefully than ever at the terms and conditions of mortgages and consumer loans. Lending practices are changing fast, and borrowers can't keep up with them. "More people are getting into things they don't understand," says Robert Hobbs of the National Consumer Law Center, and it's costing them more money than they expected. Here is what's going on:
--More lenders give demand notes. These notes can be called in by the lender at any time. If he wants higher interest, he can order you to pay off the loan or refinance it at higher rates. Some notes give you a period of interest-rate protection before becoming demand notes, others don't.
Eight months ago, about 400 mortgage holders of the Arlington Trust in Lawrence, Mass., learned abruptly that they held demand notes. Loans made between 1972 and 1980 were called in. If refinanced, monthly payments would have risen by $27-$350, depending on the size of the loan and when it was made.
Some consumers agreed to pay. Others charged that the bank had not explained the demand feature. They refused to pay and filed suit. In a similar situation in Buffalo last year, the publicity became so bad that the bank backed down. Many other banks in this situation have hung tough. The Lawrence bank said that all the borrowers had lawyers, who should have told them what demand notes were. --Nevertheless, the bank recently reached a settlement with its aggrieved borrowers, that lowered the size of the interest-rate increases. The biggest concessions went to people who agreed to pay off their mortgages within five years.
--Many low-interest loans aren't really low-interest. A car dealer might advertise car loans at 9 percent. But to compensate for the low rate, he'll charge more for other things. For example, he might not discount the car below list price or give you as good a trade-in deal as you might get elsewhere. Taxpayers who itemize are better off paying the finance charge in the form of tax-deductible interest, rather than paying it in a higher car price.
Similar problems are occurring in real estate. A builder might advertise below-market financing, but compensate by raising the house's price.
--You'll find more variable-rate consumer loans. These loans are linked to open-market interest rates. Your monthly payments could rise or fall, depending on what happens to rates in general. Ten percent of America's largest banks now put variable rates on their consumer loans and more than 50 percent plan to do so in the future, according to the American Bankers Assn. Smaller banks, too, are getting on the bandwagon.
The Federal Reserve Board estimates that a rise in interest rates of one percentage point increases monthly payments on the typical auto loan by $3, compared with $40 or more on a mortgage. So variable rates on consumer loans don't pose as great a financial threat as they do on housing loans. Nevertheless, they make it hard for you to predict credit costs.
--More people are being trapped by balloons. With a balloon loan, you get level monthly payments for a certain period of time. After that, the entire loan falls due. You then have to repay, or else refinance at whatever interest rate is then current. Balloon loans may have lower payments at the start, so some people walk into them with their eyes closed. When repayment time comes, they may be in trouble.
--Credit-card interest rates are soaring. Most consumer credit now costs anywhere from 18 to 24 percent. "Some banks still feel that no one will want loans with rates above 18 percent," John Meddough, marketing manager of Financial Publishing Co., told my associate, Virginia Wilson. "But that could change. Not too long ago, we never thought rates would go beyond 10 percent."
--It's not so easy to compare loan costs anymore. The annual percentage rate (APR), which must be shown on the loan agreement, shows your credit cost right now. But on a variable-rate mortgage, future costs depend on which index of interest rates you're linked to. It's also hard to gauge the likely effect on your pocketbook of a three-year balloon versus a five-year balloon. Without fixed rates and terms, a loan is a gamble. You can only compare APRs, compare monthly payments, examine all the other terms, then cross your fingers and hope for the best.