Predatory Lending part two
Today is Veterans' Day, so please take a moment to remember all those who fought and who died for this country.
Yesterday I posted about widely recognized predatory lenders such as payday lenders and car title lenders, and today I'm going to continue with more insidious but still predatory lenders. While they come in a wide variety of forms, today I'm focusing on two: Predatory auto lenders and furniture retailers.
When a lot of people shop around for a car, they only consider the monthly payment, not the duration of the loan period or interest rate and definitely not the insurance, gasoline, and maintenance costs. In doing this, it's easy to buy more car than one can afford, especially if one is young and has higher insurance rates. Throw in a short or spotty credit history, and what seems to be a reasonable purchase can be anything but. In this area, it's not uncommon to see interest rates on car loans as high as 20 percent. While buyers could probably get a better deal if they would shop around for financing or saved up some money for downpayment, most don't, and the local car economy loves to mention how affordable their vehicles are. Let's look at an example of this affordability.
Seaman Bob has no family, lives in the barracks and decides he needs to buy a car so he can go out on the weekends. He goes to a local dealership and looks at a wide range of vehicles, and though the salesman is pressuring him to buy a $30,000 SUV to "make a statement," he settles on a new midsize car that costs right around $25,000 after sales tax and other fees. He has no downpayment, so he has to finance the whole thing, and because he's only 20, he doesn't have much credit history, so the salesman tells him the interest rate on the loan will be 19%. Seaman Bob shrugs, he's never bought a car and 19% sounds good to him. The payment is only $650 per month for 60 months, and right now he's making just under $1600 per month. Since he doesn't have any housing costs, $650 is more than manageable for a car payment. Then the loan officer at the dealership tells him that until the car is paid in full, he needs to have comprehensive coverage on the vehicle. A quick call to the insurance company and Seaman Bob is the proud owner of a $150-per-month full coverage insurance policy. His total car costs are now $800 per month but hey, that's just half of his paycheck and he'll be up for a promotion soon! Then he remembers gasoline is still at least $2.00/gallon, so he's going to have to pay for that too, and registration, and possibly property tax. The car is more expensive than he'd realized, and now he's committed. (For those of you following along, he'll pay about $39000 for the car loan, plus another $9000 for car insurance while paying off the loan. That's a lot for a guy who is making less than $20K annually in base pay!)
For most Seaman Bobs I see, this moment of clarity doesn't come until several months or even years after they've signed the car contract. They want to move out of the barracks or get married or leave the military but they have a car they've been paying $800/month on for three years and have another two years to go before it's been paid off and it's really cramping their personal finances. Some consider refinancing the loan, but if they've missed any payments that's probably not an option, or if the remaining balance is mostly principal it won't save much money either. Some end up trashing their credit and having the car repo'ed, where it's auctioned for a pittance to a dealer, cleaned up, and resold to another buyer, where the same thing might happen again.
The other type of insidious predatory lending is that of furniture retailers. These companies either sell furniture outright or on a rent-to-own basis, but they require that all purchasers agree to a finance plan that is favorable to them. When my husband and I moved to this area, we found ourselves in a largish apartment that was devoid of furniture, so we set out to find a couch. We'd seen ads on TV for a place that offered discounts for military personnel so we went there, because we didn't know where any other furniture stores were. As we were in the store, looking around at the selection and the price tags (which were conspicuously absent), a saleswoman approached us and asked if she could help us find something. We said we were looking for a couch and if we found something we liked, we'd let her know, and by the way, where are the price tags for this furniture? We'd hoped to pay cash when we decided to buy something. She immediately stiffened and said, "Well, we FINANCE all furniture we sell here because we sell to MILITARY personnel." My husband told her he was active duty and that he wasn't interested in financing something we viewed as a non-emergency purchase. She stonewalled him, and we left, never to return, and bought a fabulous couch elsewhere.
While we never got tangled up with them, some other people I know had a lot of difficulty working out a short-term rental with them. Apparently the papers they use to finance everything are very tricky, and if you sign without reading you end up agreeing to an unreasonably high interest rate. I imagine all their finance plans are similarly predatory.
From this (very long, sorry) entry we can learn two important lessons. The first of these is READ THE CONTRACT! Do the math. Crunch the numbers and realize you don't want to be paying $800/month for FIVE YEARS to own a new car. The second lesson is to have a downpayment and some semblance of a credit score. A downpayment means a smaller amount financed by you and a smaller amount the creditor might potentially lose. A decent credit score does the same thing. It makes the creditor believe that you are capable of making your payments in full and on time and that you'll be less likely to default on the loan.
You have to look out for yourself, because your creditors are not looking out for you.
Yesterday I posted about widely recognized predatory lenders such as payday lenders and car title lenders, and today I'm going to continue with more insidious but still predatory lenders. While they come in a wide variety of forms, today I'm focusing on two: Predatory auto lenders and furniture retailers.
When a lot of people shop around for a car, they only consider the monthly payment, not the duration of the loan period or interest rate and definitely not the insurance, gasoline, and maintenance costs. In doing this, it's easy to buy more car than one can afford, especially if one is young and has higher insurance rates. Throw in a short or spotty credit history, and what seems to be a reasonable purchase can be anything but. In this area, it's not uncommon to see interest rates on car loans as high as 20 percent. While buyers could probably get a better deal if they would shop around for financing or saved up some money for downpayment, most don't, and the local car economy loves to mention how affordable their vehicles are. Let's look at an example of this affordability.
Seaman Bob has no family, lives in the barracks and decides he needs to buy a car so he can go out on the weekends. He goes to a local dealership and looks at a wide range of vehicles, and though the salesman is pressuring him to buy a $30,000 SUV to "make a statement," he settles on a new midsize car that costs right around $25,000 after sales tax and other fees. He has no downpayment, so he has to finance the whole thing, and because he's only 20, he doesn't have much credit history, so the salesman tells him the interest rate on the loan will be 19%. Seaman Bob shrugs, he's never bought a car and 19% sounds good to him. The payment is only $650 per month for 60 months, and right now he's making just under $1600 per month. Since he doesn't have any housing costs, $650 is more than manageable for a car payment. Then the loan officer at the dealership tells him that until the car is paid in full, he needs to have comprehensive coverage on the vehicle. A quick call to the insurance company and Seaman Bob is the proud owner of a $150-per-month full coverage insurance policy. His total car costs are now $800 per month but hey, that's just half of his paycheck and he'll be up for a promotion soon! Then he remembers gasoline is still at least $2.00/gallon, so he's going to have to pay for that too, and registration, and possibly property tax. The car is more expensive than he'd realized, and now he's committed. (For those of you following along, he'll pay about $39000 for the car loan, plus another $9000 for car insurance while paying off the loan. That's a lot for a guy who is making less than $20K annually in base pay!)
For most Seaman Bobs I see, this moment of clarity doesn't come until several months or even years after they've signed the car contract. They want to move out of the barracks or get married or leave the military but they have a car they've been paying $800/month on for three years and have another two years to go before it's been paid off and it's really cramping their personal finances. Some consider refinancing the loan, but if they've missed any payments that's probably not an option, or if the remaining balance is mostly principal it won't save much money either. Some end up trashing their credit and having the car repo'ed, where it's auctioned for a pittance to a dealer, cleaned up, and resold to another buyer, where the same thing might happen again.
The other type of insidious predatory lending is that of furniture retailers. These companies either sell furniture outright or on a rent-to-own basis, but they require that all purchasers agree to a finance plan that is favorable to them. When my husband and I moved to this area, we found ourselves in a largish apartment that was devoid of furniture, so we set out to find a couch. We'd seen ads on TV for a place that offered discounts for military personnel so we went there, because we didn't know where any other furniture stores were. As we were in the store, looking around at the selection and the price tags (which were conspicuously absent), a saleswoman approached us and asked if she could help us find something. We said we were looking for a couch and if we found something we liked, we'd let her know, and by the way, where are the price tags for this furniture? We'd hoped to pay cash when we decided to buy something. She immediately stiffened and said, "Well, we FINANCE all furniture we sell here because we sell to MILITARY personnel." My husband told her he was active duty and that he wasn't interested in financing something we viewed as a non-emergency purchase. She stonewalled him, and we left, never to return, and bought a fabulous couch elsewhere.
While we never got tangled up with them, some other people I know had a lot of difficulty working out a short-term rental with them. Apparently the papers they use to finance everything are very tricky, and if you sign without reading you end up agreeing to an unreasonably high interest rate. I imagine all their finance plans are similarly predatory.
From this (very long, sorry) entry we can learn two important lessons. The first of these is READ THE CONTRACT! Do the math. Crunch the numbers and realize you don't want to be paying $800/month for FIVE YEARS to own a new car. The second lesson is to have a downpayment and some semblance of a credit score. A downpayment means a smaller amount financed by you and a smaller amount the creditor might potentially lose. A decent credit score does the same thing. It makes the creditor believe that you are capable of making your payments in full and on time and that you'll be less likely to default on the loan.
You have to look out for yourself, because your creditors are not looking out for you.
Labels: predatory lenders
3 Comments:
Nice one. I am glad you brought out these lemons in the open. :)
Nice post; when I bought my first car, I vividly remember trying to negotiate a cash price but the salesman always came back with, "How much can you afford per month?".
I know there are a lot of military spouse groups who try to help out soldiers, and I imagine the spouses often handle the finances; I wonder if these groups provide free informational sessions to help young soldiers with finance issues?
As I am reading your post, there is a story I found at NPR with the title "U.S. Military Works with Service Members on Financial Discipline". It's an interesting story and you can find it here.
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