Usury

[jopperm2]

I've been thinking about interest rates lately and I'm wondering what you think. How much is too much? Or should there be a cap at all? Does a debtor's horrible abuse of a loan warrant a 30% rate on the next one? What about late charges? What do you think?

[Magrus]

I do my absolute best to not get into any situation that will have me owing another someone money. I've occasionally miscalculated and used my debit card once or twice with no money in my account and been hit with charges for that, but that's the closest I've come to debt.

I don't get credit cards, so I can't charge things. I don't take loans, which is why I haven't gone back to college. I don't like the thought of owing someone more money than I can make within in months time. I'll pay for it on my own or not at all. I won't buy a car unless I can pay cash for it. My uncle did that, bought a nice, brand new car after saving his cash for like 6 years and has no loans or anything for that. Not rich or anything, just opened a bank account and saved himself enough to get a car.

To me, if you put yourself in a situation where you accept a loan, it is your utmost obligation to pay it off. Odd circumstances can occur, death of a spouse or an accident or just a crash in the job market or something. That could leave you unable to pay for the loan, but still, it IS your responsability.

If those who loaned you the money don't get their money, they're going to be upset as that money is a part of their jobs. If one or two people miss their payments for a few months to a huge bank, no big deal. If everyone does, then the bank shuts down, and the families of those who work there don't get paid and don't get food. A system that slowly increases pressure on those who can't pay their bills seems fine to me.

My family went into debt when we got screwed by the town and built a house on unstable ground, which they lied about. Lost the house, went bankrupt trying to sue the town, etc. etc. It's made me wary of how I spend my money.

From what I've seen, the people who end up with huge interests rates and horrible credit problems, generally are completely irresponsible.

My friend, the one who's mother just died, their family has horrible credit. But then, they had one parent, taking care of two children, and trying to hire nurses and 24 care for his sick wife. They bought a house and all sorts of stuff with the expectation they'd have two sources of income, and then she got sick and instead of having two sources of income, they had one, and twice the cost of living. Thats one of those crappy situations that will put you deep into debt that just sort of jumps up on you out of the blue.

From what I understand, if you get into debt like that, you can get out, so long as you prove your responsible and pay on time and such for a certain amount of time. That seems logical. I do think they should put a limit on the interest, I've no clue what it is to be honest, but if someone repeatedly fell through on loan after loan, I'd charge him a high one myself.

The real question is, where do you cut off people, and send them up to the next step of debt and a reaction to it? Late charges on your phone should just affect your phone bill, unless, you say, don't pay it for 3 months or so straight. Then I'd say it should start affecting other things. One late payment, on rare occasions shouldn't matter all that much. But when you are consitantly late, it shows a pattern and your a risk to anyone who you owe money to.

[Luis Antonio]

I say loaning is good. I know its easy to get all screwed up - it is really easy.

Credit cards are a trap in your pocket, thats what I say. I've screwed my credit card, and I had debts I had trouble to pay. But I 've organized my finnancial life enough now to trust loaning.

In Brazil, depending on the loan you take, you'll pay 120%, 130% a year. So, for us, 30 % a year is really low tax. I guess, Jop, you could try to lower this by: If you want to lend this, try giving something as guarantee for the loan, and dont make the loan for any purpose: Make it directly. For example, the rate to loan a car is around 12% a year here. If I loaned it as general purpose cash, I'd pay 120%, got it?

I'm keynesian, so if you're gonna loan, try placing it on "production". For example, some school you want go to through, some productive machinery you want to buy...

[jopperm2]

Wow! 130%? That's crazy! If you borrowed $1000 for a year you would pay about $833 in interest! That's nuts!

What I'm wondering is if you guys think it is moral for companies to penalize this much or not. I can tell you this much, your interest rate is usually indicative of how you make your payments or it's lower.

[Luis Antonio]

Quote:

Originally Posted by jopperm2 Wow! 130%? That's crazy! If you borrowed $1000 for a year you would pay about $833 in interest! That's nuts! What I'm wondering is if you guys think it is moral for companies to penalize this much or not. I can tell you this much, your interest rate is usually indicative of how you make your payments or it's lower.

Everything has a price. Money also has a price. So, I'm ok with interest rates. I'm not ok with high interest rates, such as those I've mentioned. Also, if someone says "ok, I have money to spare, so I'm lending it to you" its only fair that you'll be paying or retributing in some kind of coin with this person.

[jopperm2]

But where exactly do you draw the line? I don't agree with 100+ percent interest either, at least not on an installment or revolving loan. Defferred presentment is another matter though. They charge like 500% apr and I'm fine with that. Still though. I have customers that are paying 30% interest and we still get taken by some of them.

[Luis Antonio]

The line is drawn like this:

you measure what's your risk. So, for how much is worth it to risk this capital you have?
Then, you measure the time span. Is it a long time, planned loan? Is it a short time, "hole control" loan? Usually, "hole control" loans are more expensive. Also, do I have a guarantee? Guaranteed loans work cheaper, because you're saying "see, this is my property, if I dont pay, you get this".

Its pretty hard to define exactly what do the finnancial institutions use as criteria in the first look at the interest rate. But if you analyze, they study the country risk, your age, how much do you receive as payment a month, between many other things.

[VonDondu]

Loans are essential to the "American dream", because they give people the illusion that they own the cars they drive and the houses they live in, when those things are actually owned by the bank.

[jopperm2]

@Luis, I work for one of the largest lenders in the world, I know how it works. What I'm asking is should it always work that way?

@VD, Too true. Have you ever read any Dave Ramsey?

[Luis Antonio]

Quote:

Originally Posted by VonDondu Loans are essential to the "American dream", because they give people the illusion that they own the cars they drive and the houses they live in, when those things are actually owned by the bank.

lol Never thought of it like that, but yes, that's true too.

@Jop: I think its ok... I dont see failure in the sistem. we're capitalists, so how could we charge the use of other people money if not by charging more money?

[jopperm2]

I agree with interest and everything. I'm a laissez faire capitalist if there ever was one. Sometimes I just wonder if there is such a thing as too much.

I'll give you an example. A person with really bad credit might finance a car for about 32% with me. Now they would have to have more than just run of the mill bad credit to get that kind of rate mind you, so I don't have much pity. I loan them $25000, that's pretty standard for a new economy car including tax, title, registration, and dealer fees. It's a six year loan, that's about as far as my company likes to write them. That would mean that the payments they'll make for the next six years will be $784.63. That's a lot! With the same car and term but a 9% apr(that's more standard.. Usually someone with minor bumps in their credit or not much established credit) they would only pay 450.64.

It seems fair enough considering what the person must have done to get that kind of credit. It's usually multiple repossesions, a lot of late payments covering the entirety of the last seven years, and a bankrupcty. Say the customer loses his job after six months. He's made every payment on the exact due date and has paid the 784.63 each time. Assuming this is a simple interest loan he would still owe $24255.28 even though he has already paid us $4707.78 over those six months. Keep in mind that he is still assessing $21.26 per day in interest. That's a little better considering that he was paying $21.92 When he bought it. Also keep in mind that those figures are calculated based on the customer starting payments 31 days after he buys the car, most of our loans start 45 days after the contract is signed. so he would have paid a lot more. It doesn't seem like much more, but it's about $350 difference.

So anyway, he decides he can no longer pay for it and returns the vehicle to us voluntarily. We sell it at auction and get $19000 for it. That's pretty generous, we probably wouldn't get that much. The customer would still owe $5255.28 on the vehicle he no longer has. If he can't pay it in the next 10 days we will charge it off. That's going to be a big hit to his credit. Then we will assign it to a local attourney and get a judgement filed against him. That's another hit to his credit and it will appear in his public records so anyone can see it. This is really important when he's looking for a new job, because they will likely do a background check on him and it WILL come up. They don't even need your permission to do that cursory of a check. Many places won't hire you without a full credit check.

Once the judgement is filed we will begin serious collection efforts. Usually we shoot for a garnishment of wages. The judge will generally shoot to have it paid in a year. So assuming you now have a job(fat chance), you will be paying $437.94 per month for a vehicle you don't have whether you can afford it or not. Makes it hard to get another car so you can go to work. Not that anyone will loan you money for a car anyway now.

So far this customer has paid $9963.06 to drive a car for six months and trash his credit even further than it was before. Meanwhile I made $3963.06 minus what it cost me to write the loan. It would be about a $1000.00 profit in the end. This is kind of a rough example too as the customer would have to pay fees resulting from the repo and auction. Probably about $600 depending on where he lives.

Sometimes I just don't think people get a fair shake. Don't borrow money if you can't afford it and don't buy new cars people.

[Luis Antonio]

Quote:

Originally Posted by jopperm2 Sometimes I just don't think people get a fair shake. Don't borrow money if you can't afford it and don't buy new cars people.

Jop, is it about ethics? Is the ethic of selling money at high taxes that people wont be able to pay? I mean, selling money is hard, cause often you dont believe that it is a good thing to do.

I doubt you're all laissez faire, but ok, ok, I'll just not comment about that

Now, if you think, when will a person with such a lack of planning buy a car for himself? Or when would he be able to garther such 25000 dollars ammount? Never, or in six, seven hard work years, with all that money there, smiling at him. He lends because he knows he cant keep it - he will spend the money he has, and having a bill helps him. He has the car and the bill - so he's happy. He may be unable to pay it - but then his planning capabilities are even worst than I thought.

I'm actually convinced that loans are usefull, and fair - people still fail to understand the implications on them. Its a contract, a long term contract. If you're loaning to do something that wont raise your income, you're really in need of clever planning and good budget. If you loan to raise your income - to buy new machinery, for example - you need good planning, but you're on the right track, IMO.

[jopperm2]

I'm mostly laissez faire. More than most of the members here at least.

I'm glad that someone more liberal than me doesn't think it's wrong. As of 9:00 pm eastern tonight I'm officially no longer in the business, but I've been thinking about it.

I just wish poor people with bad credit would stop buying new cars.

I'm really interested to see what others think. Perhaps someone more liberal than either of us. Not because I think they'll radically disagree, I would just like a deeper investigation of it by the very resourseful people here. I don't know if it interests any of them though. oh well.

[Luis Antonio]

You know, I guess its a matter of how the cash is sold... If you could make a planning for the family, the company would have happier/better clients through a lifetime, not people who hate those guys who leaned money to hi cause they're just vampires. But then, I'm only traveling on my own thoughts of how should the banking/loaning services be.

Now, I'm completely keynesian - I guess liberalism wont work in a non utopic world with paper people, and if these paper people are fair and good and marvelous.

[jopperm2]

I should look that up Keynesian. I wonder if I have traits of that. I think it would be nice to help everyone but I can't stand to take from one to give to the other.

I just took some calls and re-realised that most of my customers with bad interest rates are scumbags. No more feeling bad from me! I'd still like to hear from the likes of fable, CE, frogus, Dottie, Chanak, Aegis, or any of my other normal debating partners. It probably doesn't interest anyone though. Finance can be kinda boring. I like it though.