Monday, March 3, 2008

Are all lenders inherently predatory?

There was an article in the Dallas Morning News yesterday about how Mesquite, Texas (a suburb of Dallas) is limiting where check-cashing businesses and payday lenders may open shop. The city's argument is that "they hurt economic development in areas where too many of them cluster." I can't blame the city for making this decision -- have you ever driven through a neighborhood where there are lots of these types of businesses? More often than not it's a blighted area of town where other businesses don't want to open because it doesn't appear to be "economically viable".

This got me thinking, though. It's hard to argue that payday loan businesses and check cashing businesses that charge such huge interest rates aren't inherently predatory. In days past these types of businesses were called "loan sharks" and were illegal. Now they operate out in the open in our strip malls with no fear of arrest and prosecution. In a way, many credit card companies are no different. They often charge exorbitant fees and high interest rates. Take a look at your credit card contract and you'll see what I'm talking about. There are fees for making a late payment. There are annual fees for the "privledge" of using the credit card in the first place. There is "universal default" where the credit card company retains the right to raise your interest rate if you are late on ANY other credit obligation even if you have never been late on that card. There is an "over limit" fee for when you go beyond your limit.

WHAT? How do you go beyond your spending limit? Isn't a "limit" defined as a maximum allowed? Whatever happened to charges being denied because it would put you over the limit? Well, apparently credit card companies have found that their customers would rather pay an over the limit fee than be embarrassed at the point of sale by having their purchases declined.
Then it starts to snowball on you -- you pay the fee every single month that your balance is over the limit. If you are making only minimum payments it's very likely that the payment won't be enough to cover the interest and that fee; therefore you will still be over the limit, especially if you continue to charge on the card. Do you see the vicious cycle in which you will soon find yourself? And that credit card company will be happy to do all it can to keep you in that predatory cycle.

What about mortgages? On the surface, I would say that mortgages are the only kind of debt I might consider classifying as "good". If course, this assumes that you have not taken out a mortgage for more than you can afford to realistically pay. Back in the days before and immediately after the depression banks often called in their mortgage loans and demanded payment in full immediately. That's what ruined many families. Today, however, there is legislation that prevents banks from doing that; they can't call in your mortgage before the term is up (typically 15 or 30 years). So everything's great, right? Not necessarily. What happens when you get behind on your mortgage? They will require you to "catch up" in one lump sum and won't even accept a partial payment. And the interest is still accruing along the way. If you get far enough behind they will start foreclosure proceedings and sell your house. I don't know that I would call any of these things predatory, though. I do know that leading customers into sub prime high-interest rate mortgages is predatory. There used to be a day and time when banks felt like it was alright to decline to write a mortgage for someone because they didn't have enough of a down payment or couldn't show their ability to repay the mortgage. Now it's almost like banks are afraid of hurting our feelings! They seem willing to write a mortgage for pretty much anyone as long as the interest rate is high enough. Unfortunately for them (and indirectly for the rest of us) banks are being bitten in the behind for these practices and the term "short sale" has become a common phrase in our vocabularies.

The bottom line? Get rid of all your debt as quickly as you possibly can, including your mortgage. It's all a noose around your neck just waiting to be tightened. No, mortgages aren't as bad as other credit options, but it's best to remember that if you lay down with snakes you shouldn't be surprised to way up bitten.

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