For many Latino families, average household incomes in the past decade have gone down. Hispanics lost 66 percent of their household wealth following the Great Recession, and unemployment has been high among Latinos. This has resulted in two things. Households have reduced spending, but for big expenditures like mortgages, automobiles and higher education, families have to take on additional debt.
In the case of auto loans, for example, families with low credit scores have basically two options: Applying for a loan over the internet with a lender the consumer has never heard of, or financing through the car dealer. Low-income consumers or those with poor credit are more subject to yo-yo scams, where the dealer changes the terms of the initial loan yet refuses to give money back to the family if they don’t agree, and even threatens the consumer with auto theft if the buyer does not immediately return the car. Most families agree to the changes and pay interest rates of 5 percentage points or higher than conventional loans.
As credit has tightened, more low-income borrowers or those with subprime credit are using these kinds of services, warns the report.
In the area of student loans, the average student is graduating with around $25,000 in debt, and in 2008, eight percent of Latinos had debt of over $40,000. That percentage will increase as more Latinos pursue higher education. One way to limit risk is to take out federal loans instead of private student loans. Yet the study found that 40 percent of families had not used up their federal student loan eligibility, even though federal student loans have lower interest rates and easier payment terms. Private loans are riskier, since the uncapped adjustable rates make it harder for students to anticipate how much they will be paying years later. Private student loans cannot be discharged in bankruptcy.
“A recent survey of student loan borrowers with high debt levels found that about 65 percent misunderstood or were surprised by aspects of their student loans or the student loan process,” said the report.
Understanding the risks of student loans is especially important as higher unemployment and a tighter job market has made it harder for more students to repay and has contributed to more loan defaults
The Center for Responsible Lending, urges Latino families to visit non-profit centers in their communities to obtain financial counseling and guidance before embarking on a car or student loan
Source: NBCLatino, by Sandra Lilley, Report: Predatory auto and student loans still targeting Latinos, December 14, 2012.