University of Illinois Extension

Avoid Money Traps

Mortgage and Home Equity Loans

Some mortgage lenders target people who don’t have much money and may be poor credit risks. These mortgage lenders offer high-interest loans with hidden fees and leave borrowers deeper in debt or bankrupt. Be leery of telephone solicitations, TV ads featuring sports or other celebrities, or door-to-door salespersons selling mortgage home loans.

Other lenders offer home equity loans in the same way. When you take out a home equity loan, you put up your home as security, or collateral, for the loan. These loans can often look like a good deal, but you can lose your home if you can’t make the payments.

A home equity loan is often advertised as a way to consolidate different loan payments, such as credit cards, with one payment. The advertisements contain charts showing how monthly payments will decrease if a home equity loan is taken out. However, look closely at how long it will take to pay off the loan. It’s likely that it will take much longer and will cost you more money. This is not necessarily the good deal that it first appears to be!

Also, too often when a home equity loan is used to consolidate credit card debt, people still use their credit cards. Then not only is there a home equity loan to pay, there is also new credit card debt.

Beware of creditors who want to lend you up to 125 percent of the value of your home. These creditors may send attractive looking offers via the mail, often accompanied by “fake” checks in the amount of up to $70,000, or they may contact you by phone. The interest rates on these loans are likely to be much higher than those from a conventional bank. Remember, if for some reason you can’t make your payments, then you can lose your home.

Think twice before taking out a home equity loan. Imagine what might happen if for some reason (such as losing a job) you can’t repay the loan. Decide if you can still safely afford to repay the home equity loan.

Watch for extra fees or services that may be packaged with home equity loans. Don’t let lenders add fees or services that you don’t want (such as credit life or regular life insurance) to your home equity loan.  Otherwise you will end up with more debt than you want or can afford.

If you decide to take out a home equity loan, shop around for the best interest rates. Read the fine print and ask questions if you don’t understand what you are signing.

Before You Borrow Money . . .

One mistake people make is assuming that predatory lenders are their only options for borrowing money. Instead of using rent-to-own plans, save enough money to buy furniture. Or, shop garage or household sales and thrift stores to find lower-priced furniture. If you need money to pay your utility bill, talk with your utility company to see if they have a budget plan or other programs to help you.  Also, seek assistance from community or government programs, your church, or your employer.

  • Don’t take the first loan you’re offered–shop around.
  • Look for the lowest annual percentage rate (APR).
  • Compare the APR and other finance charges.
  • Know the total dollar cost of the loan.
  • Avoid lenders who pressure you.
  • Borrow only as much as you can afford to repay.
  • Get a written copy of the loan agreement.
  • Read the fine print.
  • Don’t sign anything you don’t understand.
  • Consider all of your options.
  • Save money by paying with cash!

Check Out These Resources

American Association of Retired Persons

Better Business Bureau

Consumer Action

Consumers Union

Federal Reserve System

Federal Trade Commission


Casey, Michele and McWilliams, Valerie. Predatory Lending Curriculum. Champaign, IL: Land of Lincoln Legal Assistance Foundation, Inc., 2001.

Hildebrand, Pat. Rent-to-Own Deals (fact sheet). Urbana, IL: University of Illinois Extension, 1998.

Payday Loan Student Worksheet. Champaign, IL: Land of Lincoln Legal Assistance, Foundation, Inc, 2001.

Your Money & Your Life Financial Education Curriculum. Lesson 2, Avoiding Money Traps. Urbana, IL. University of Illinois Extension, 2004.

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