If you happened to have had a bad day during the Great Recession, the odds are you’re rebuilding your credit. If your credit score took a major hit, or if you’ve filed bankruptcy, it’s quite possible that you’ll get an offer in the mail from a company that wants to help you on your financial ‘comeback’. The company will tell you they “think a loan should be convenient and on your terms”, and they’ve “changed the way you borrow money”. Rocky Balboa’s face, strong and determined, is prominently displayed in the advertising copy.
You can start your comeback by filling out a simple application for a pre-approved $3,500 loan. This money will be deposited directly to your bank account. The rate may be steep in the beginning, but it will decrease as you show your ability to make payments. After all, there is a risk to providing you credit, but the company wants to help restore you as a respected member of the financial community.
The company dying to help you is RISE, a brand of Think Finance, who packages itself as an ‘emergency non-bank lender’. This is just double speak for a sophisticated form of predatory lending. The APR on their loans range from 36 to over 360%. A recent offer carried an interest rate of 199%. For the privilege of receiving $3,500, you’ll pay back $10,800 in payments of $289 made every two weeks. Instead of Rocky Balboa, their promotional icon should be Tony Soprano.
If you’re in the position to pay $578 per month, simply saving that amount will produce the same $3500 in six months.
The real point is whom this is aimed at. People who are down on their luck and having real financial problems. It’s predatory credit aimed at people with no options. This loan does not help them rebuild their financial life. It’s picking the bones of what’s left of it. It’s immoral and, I personally believe, should be criminal and the reason for my belief is not far fetched.
As an individual in California, I can’t charge more than 10% interest. Yet, if I have a specific kind of license, I can charge up to 700%. Why is this legal? Why the distinction between what is just for me, as a real person, and a corporation, as a legal person?
This opens the broader question about why we allow credit card companies to charge 30% or more in interest. Why is it okay for them to bleed people? Why is it okay for consumers to be trapped with balances they’ll likely never pay off while the issuing banks build skyscrapers, buy naming rights to sports arenas and pay themselves ridiculous bonuses?
Before you say it’s the responsibility of the individual to control their finances,
you’re right. Just like it’s the responsibility of a crack smoker not to use the drug. But also keep in mind that we prosecute the drug dealer for creating the moral hazard of making the drug available.
We don’t regulate banks to prevent the moral hazard of financial overextension and predatory interest, but we should. Interest rates should be limited to what is permissible for individuals to charge or what market conditions truly dictate. With prime interest rates in the low single digits, no amount of risk justifies a 30%, let alone a 300%, interest rate.
Lowering the interest rate for consumers would stimulate the economy by putting more dollars into their pockets instead of it going to lenders. It would also allow people the opportunity to understand their financial situation and be able to dig out before facing bankruptcy as the only option. Finally, without the option of making a killing from failing borrowers, institutions would make lower amounts of credit available with tighter conditions, reducing the moral hazard of large credit lines justified only by sky high rates. Would some marginal borrowers be forced out of the market? Absolutely. But the kind of credit that companies like RISE offer isn’t help. It’s enslavement.
Enormous power has built up in a very few banks. They are able to dictate credit terms that would have brought outrage just a generation ago. When I was young, the Mafia was villified in congressional hearings for extorting 30% interest. What was once called extortion are now terms and conditions. You’d get a better deal with Tony.
Until we understand that this practice is one of the reasons that our economy is slow, and that more and more people will continue to fall into financial peril, we can expect more criminals will RISE.
Charcoal drawing by DeviantArt, Suicide by Straight Pin; Screen capture from ‘The Sopranos”, HBO Films – Ed