How much should society control bad financial behavior?

[jIM_Ohio]

One saturday prior to election day, my income tax class got into a 1 hour debate on "payday loans".

My stance is free market- let them stay in business and no need to restrict their business practices. Basic logic is that a payday loan is a sub prime loan- they need to charge 20%+ interest rates because around 25-50% of the loans made will be defaulted on- to stay in business the payday loan providers need to have many loans. Once an issue on the ballot restricts a person to 4 loans per year, it is difficult for the business to stay open. My additional comment is that if the payday loan had a "bad customer", why they would want to loan money to a person 3 times when they were burned the 1st time is beyond me- it is not up to society to decide how someone spends their money.

We see issues similar to this on the boards all the time- people being allowed to borrow way more than they could pay back on cc's.

What do you think- is it up to society to determine and eliminate bad PERSONAL financial behavior (save comments on bad corporate financial behavior for another thread).

BTW_ I just found a cool button in upper right corner to expand the size of the posting window. COOL!

[Gjowers]

I think laissez-faire free market at all costs policies are what got us into this mess. We have a long history of usery laws in this country - these are laws that cap the maximum interest rate that can be charged. These payday loans walk a fine line between legal/illegal and sometimes jump right over that line. From what I've read they are not really intended to be repaid, but floated such that the borrower continues to pay interest in some cases exceeding the amount borrowed. My personal view is that these businesses are sharks preying on the uninformed.

[segmond]

I don't feel that free market is what got us into this, rather EXCESSIVE GREED, LIES and DECEPTION. On both sides, free market corrects itself in due time, and if the govt doesn't engage in these bailouts and we suffer, we will really learn the hard way and remember it for a long time.

The same thing you say about payday loans is the same exact statement that can be made about credit cards. If you wiped credit card debt off, we wouldn't be in this terrible recession.

I feel Schools should teach about money management starting from High School.

[GabRob]

The reeality is that the only people that get hurt by these businesses are honest people that actually pay there debts. Those who fail tp pay their debts drive the costs up for people that are honest. Since these companies do not care to check customers out properly they are actually being negligent in their business practice at the expensive of honest people. It is those honest people who unfortunately do not always know better, that a socisty needs to protect. Restricting these businesses in the end hurts n one but the dishonest customers and the dishonest operators, both of whom do not deserve to exist at the expense of honest people.

I live in Canada, here in Ontario they placed restriction on them several years ago, and guess what most of them are still in business, just at a much more reasonable profit margin. It turned out that moist of these business were making three or four hundred percent on their invest.

[Caoineag]

Wish I could source this but there was an article presenting how payday loans are actually cheaper than bouncing a check (i.e. people usually bounce or overdraft by a couple dollars but the charge is always $25+ which works out to way higher than a mere 50%).

As to my opinion, I think usury laws are good but I don't think you should outlaw payday loans because they serve an obvious purpose. So I want a free market with some reasonable outer limits to keep things within reason (would be based on the type of loan). I think having outer limits on the free market tends to help keep the greed in check.

[arthurb999]

No. It’s your responsibility to become informed and not make stupid financial decisions. I don’t think it should be the government’s job to protect the stupid.

[maat55]

As much as I hate payday loan establishments, they are the bad that comes with the good in Capitalism. I would like for them to have a, L on forehead signs in front of each office.

[disneysteve]

Basic logic is that a payday loan is a sub prime loan- they need to charge 20%+ interest rate

Jim, I might agree with you if the interest rate was 20%, but it isn't. Payday lenders often charge as much as 300% on an annualized basis. If you borrow $100 for 2 weeks and pay a $10 fee, that is an annual rate of 260%. Same goes for tax refund loans. I passed a tax place in the mall a couple of years ago and stopped to read the fine print on the poster in the window. The interest rate for the "instant refund" was 167%. I don't think the free market needs to allow such predatory behavior. I think far too many average folks don't understand what they are signing up for when they agree to one of those loans. The fee, which sounds reasonable, is what gets touted. The interest rate is buried in 4 point type deep in the fine print of the document that nobody ever reads.

This is nothing more than legal loansharking.

I do think the government should regulate the banking/lending/credit industry and prevent predatory lending like this from occurring. It prays on the uneducated and, largely, minority population. You'll never find a payday lending place or a United check cashing place in the middle class suburban neighborhood. You only find them in the inner city, lower class, minority neighborhoods. In fact, many people have realized that when these places start setting up shop in a transitional area, it is a bad sign that the neighborhood is going downhill.

[arthurb999]

Well then maybe the government should force people to go somewhere when they are young to learn basic math and how to read... so they could figure out what the contract they are signing means.
Oh yea… it’s called school. They already have.

If people don’t bother to read their loan paperwork or ask questions if they don’t understand… tough crap. I have no sympathy for the “uninformed” or “uneducated”… they got that way by choice most of time.

[sweeps]

Arthur, do you truly understand all the language that goes into these long and complex contracts? I would venture that you don't. I don't. And I consider myself a pretty "informed" and "educated" person.

Asking questions is pointless. Who are you going to ask, the company offering you the contract? They themselves don't know, or they won't tell you the whole truth -- it's not in their interest.

[disneysteve]

Well then maybe the government should force people to go somewhere when they are young to learn basic math and how to read... so they could figure out what the contract they are signing means.
Oh yea… it’s called school. They already have.

If people don’t bother to read their loan paperwork or ask questions if they don’t understand… tough crap. I have no sympathy for the “uninformed” or “uneducated”… they got that way by choice most of time.

How about requiring the fees and interest rate to be clearly stated, not buried in the fine print? At least give consumers the information they need to make an informed decision.

Have a simple form: Pay day loan agreement. You are agreeing to borrow $150 dollars. Your fee if the loan is repaid no later than December 19, 2008, will be $15. If you do not repay the loan by that date, interest will continue to accrue at the rate of 260% per year. If you agree to these terms, sign below.

What I'm opposed to more than anything is the misleading and misrepresentation that goes on. If people know what they are getting into and still want to do it, that's on them, but if the lender is burying the terms and fees in a bunch of legal gobbledygook, that's a problem.

[arthurb999]

Arthur, do you truly understand all the language that goes into these long and complex contracts? I would venture that you don't. I don't. And I consider myself a pretty "informed" and "educated" person.

Asking questions is pointless. Who are you going to ask, the company offering you the contract? They themselves don't know, or they won't tell you the whole truth -- it's not in their interest.

So you are saying you sign loan paperwork without reading or understanding what you are agreeing too

[sweeps]

So you are saying you sign loan paperwork without reading or understanding what you are agreeing too

I read it and I understand most of it. But it would be rare for ANYONE to fully understand what you're signing. Have you ever taken out a mortgage and read and fully understood the hundreds of pages that you're signing? If you say yes, I call B.S.

More to the point, not everyone can be a legal and financial expert. Someone -- and that someone has to be the government -- needs to set boundaries on what companies can con people into.

Large companies with their huge teams of lawyers easily have the upper-hand in contractual agreements. The government needs to level the playing field a bit. If not the government, then who's going to do it? You? You, Lieutenant Weinberg?

[arthurb999]

You're right... I agree.

[simpletron]

I believe the government(aka society) should teach what "good" personal financial behavior is, but not to restrict the ablity to do "bad" personal financial behavior. there is a definite lack of knowledge about "good" personal financial behavior in the general public. If the public was smarter about finances a lot of these exoctic loans would not have been made, and thus this "crisis" would not have happen or been less severe. but the question I always ask myself is "how can you expect the government to teach good financial behavior, when it is terrible at it itself"(this could be a whole new topic)

a lot of adults don't understand basic math concepts. like ask the average adult, "if you invest $100 at 10% interest for two years, how much will you have?" most will say $120, not 121. or "if a item is $10 and it is on sale for 30% and then it is marked down an additional 20%, what percentage off is the item" most will say 50% off(20+30) not 44% (1-(1-.2)*(1-.3)).

on top of not having basic math skills, most don't know what the interest rate is or how it is calculated. how many people do you know that know what the prime rate is? or LIBOR? which almost all variable interest rates are tied to. or how much/when/why their adjusted mortgage will adjust? or how long will it take to pay off your credit card debt if you only pay the mininum?

my problem with restricting "bad" financial behavior is where do you draw the line? there are somethings that are obvious things like giving a 500K mortgage to a person making 30K. but how much credit card debt is "too much"? a couple of years ago, I had about 5 times my gross income in credit card debt all at 0% with an equal amount sitting in saving acounts/CDs. if someone racked up 5 times their gross income in credit card debt by spending it on tvs, toys, cloths, eating out,.. they would never be able to escape. so how would you differentiate that I was ok and the second person is in deep trouble? or what about my uncle who started his own business but was up to his eyeballs in debt after a year when his business started to take off and now making way more money and easily paid off that start up debt. there are many good uses of debt that might end up as being classified as "bad" financial behavior.

about payday loans: Fact v. Fiction: The Truth about Payday Lending Industry Claims - Center for Responsible Lending

What I'm opposed to more than anything is the misleading and misrepresentation that goes on. If people know what they are getting into and still want to do it, that's on them, but if the lender is burying the terms and fees in a bunch of legal gobbledygook, that's a problem.

very true, there isn't a lot of clarity even in things that are suppose to provide clarity like the truth in lending page and APR from a mortgage. but the question is given how complex somethings are, how would you present it in a clear way such that an average sixth grader would understand it.(sixth grade reading level is what newspapers use and I figure most people don't have more advance math skills than a sixth grader)