A new kind of suitcase
While the use of credit has existed for thousands of years, some arguments against the use of credit have been repeated over the centuries. Today, these subjects carry a lot of baggage. A recent article from the National Consumer Law Center reveals much of this baggage, but this is just one example of the argument behind the common arguments against credit.
In this article, Maritess Lewise examines a number of arguments against credit that have endured throughout history. These are primarily the reasons for using a loan, maximum loan interest limits, loan profitability, loan origination, Rule 78, and loan insurance. By focusing on the success of individual products rather than a myth that persists over time, policymakers can better serve the consumer credit market.
Case number one: the mythology of reasons for using credit
- Myth. Using a loan is an attempt to live beyond financial capacity. It was seen as a moral evil or the cause of future economic upheaval.
- Reality. Credit and the credit process do not increase consumers’ resources or make them survive unless they repay their loans. People often borrow money to reschedule spending instead of increasing the amount. By borrowing today, they can incur a substantial education and durable goods that will pay them back over time, although they may have to cut down on future expenses to make payments.
Case number two: the mythology that installment cash loans with high annual interest rates are necessarily predatory
- Myth. The government has always protected consumers from predatory lending by restricting interest rates.
- Reality. As loans increase, costs and risks increase. However, it should be noted that they can decrease in proportion to the size of the loan, which means that a larger loan may have a lower interest rate and a higher interest rate than a smaller loan; this is not necessarily predatory. While a multi-million dollar loan can be significantly more expensive than a thousand dollar loan, it may have a lower cost for every dollar borrowed and therefore a lower interest rate. Also, a high annual interest rate can result in a very low dollar cost when applied to a low balance that pays off quickly.
Suitcase number three: a conceptual mythology about prices and prices
- Myth. Annual rates (APRC) for installment loans are much higher than for other loans, so the total cost of consumer loans is much higher than the cost of other loans.
- Reality. APRs are a good tool for comparing similar loans, but they can be misleading when it comes to loans with different repayment plans. In the case of installment loans, interest costs decrease with each loan repayment, which translates into lower financing costs than in the case of the simplified application of the interest rate to the balance. Since dollars are the true cost of a loan, there are times when the dollar amount you spend can be especially helpful in your decision making.
Case Four: The Mythology of Operations and Profitability
- Myth. High loan prices bring lenders big returns.
- Reality. This myth was widely tested in the 1960s and 1970s, which is why the installment loan market was profitable, but not more profitable than other markets. When the term loan market caps were removed, the short-term reaction was a slight increase in profitability, but over time these gains were replaced by competition and more comprehensive credit service.
Suitcase number five: the mythology about the calculation of rates, discounts and 78 rules
- Myth. Lenders use interest rates to take more than they should and mislead consumers into taking more than they deserve.
- Reality. For fixed loans for equal payments, repayments of unearned fees can involve complex mathematical adjustments if these loans are repaid in advance. In the past, many algebraic methods were available for these calculations, but the method called Rule 78 has found its place in government regulation as a fair and easy-to-use method for borrowers and lenders. Currently, much interest in Rule 78 is historical, although it is even more controversial than its application or effect.
Suitcase number six: the mythology of crime and rebirth
- Myth. The high percentage of loan extensions in the portfolio indicates an abuse of “loan cancellations”.
- Reality. Most loan extensions add money without updating failed accounts. Mathematical portfolio simulations easily show that lenders can be in a permanent state of high turnover while still having rules that prevent “borrowing.”
Seventh case: the mythology of by-products, especially credit insurance
- Myth. Loan insurance products are simply a way for lenders to increase the cost of your first loan.
- Reality. It appears that concerns about credit insurance are not due to the futility of the product, but rather to the distribution methods used in the credit process. While critics say that lenders sometimes try to trick customers into buying the product, evidence shows that many customers don’t even offer it, and the low percentage of buyers appears to be very happy for most.
Politicians must be cautious when dealing with personal credit myths. Individual loan products must be allowed to hang or fail and, if useful, must thrive in a political environment that encourages their success. If the existing rules on traditional consumer installment loans don’t help borrowers and lenders, that doesn’t mean that more rules are necessarily more useful or better. Perhaps fewer rules, or in some cases repealing existing ones, would be a better option for the consumer credit market.