Okay these loans certainly sound like a bad deal, but what are people supposed to do? Say your car breaks and you can’t get to work. For all of us here billing out >$100hr or whatever your local consulting rate is, the answer is some calculus around the cost of losing your job vs the cost of fixing it.
But for MOST people, the cost of fixing it is functionally infinite. They literally do not have even a few hundred dollars to, for instance, replace a tire.
Yeah, the interest on these is predatory, but then what are these lenders supposed to do? Many of the people getting these loans WILL default on them. Yes it would be great to offer these loans at a reasonable interest rate, but they are unsecured loans. The only collateral is the clients credit score.
It’s easy for all of us with our comfy tech jobs to hate on these, but to me that feels like kicking the poor while they are already down. Yeah, they know the loan is bad. They probably don’t have any other options.
Instead we should be looking at ways to make it so that giant unpredicted expenses don’t happen at all. That means cheaper transportation options, cheaper access to healthcare or preventitive care, predictive diagnostics, etc.
It helps nobody to point out how foolish the poor are.
Your income level does not make you wealthy, it is your capacity to absorb financial speed bumps. At uni, I made less money than some of my peers but I felt wealthier than them. This continued into our professional lives and had nothing to do with our relative income levels. Back then I always had spare cash to spend when an opportunity arose. An unplanned weekend trip away, a celebratory night out, no problem. Sure I didn't have what they had. No car, I took the bus instead of flying home, had to have drinks before going out rather then buying them out, that sort of stuff.
The difference was that I saved money to have savings for the sake of having a financial buffer rather than saving for something that I wanted to buy. Don't live beyond your means, it's that simple. These loans are targeted at middle class Americans, not the poor and starving. They should be able to save.
This brings up a tangential question I've had lately.
When I played video games (especially RPGs), I always ended the game with a mountain of unused resources at my disposal. I rarely used items, cash, etc, unless the ROI was plainly evident. Many of my friends would just burn through cash / items as soon as they had them, and were often in a bind during tough battles / situations. I wonder if this followed us into life.
I tend to be a saver, and have always lived below my means. Many of my friends struggle to make ends meet, regardless of their salaries.
So, I'm curious. Do / did you play video games? If so, did you end the games with a huge pile of cash, or did you burn through it as you went?
Also have similar spending patterns as the two of you, and played video games when I was younger. Yes, I had similar spending patterns in RPGs and particularly RTS games. I'd hoard resources to make sure I always had some when I needed them.
The thing is - in both video games and life, this is not always a good thing. In Starcraft, if you've banked over 1K minerals you are doing something seriously wrong; if you look at pro games, they rarely have more than a couple hundred minerals stored up, because they have a strategy that they're continuously executing and it involves burning minerals to convert into more minerals. Similarly, if I'd been willing to run with zero cash cushion, spending everything I made and locking myself into the corporate treadmill, I'd be a homeowner and have a net worth about 50% higher than I currently do. Optionality & security have a price; you trade efficiency for it, and it comes out of the standard of living you can maintain.
I think people just have a certain set point for the amount of risk they're willing to run, and it's probably partially genetic and partially from watching how your parents react to risk and internalizing that.
There was a studying showing that the trait behind this tendency towards saving, the ability to delay gratification, is present relatively early in childhood, and has strong predictive effect on success in life: https://en.wikipedia.org/wiki/Delayed_gratification#The_Stan... . Perhaps this implies that no matter how rich society gets, there'll always be people who just burn though whatever they earn. This would partially explain why people in poor countries like China and India are still able to save a greater percantage of their income than people in western countries who earn an order of magnitude more.
There was some challenge to this experiment. Once family and parental education were accounted for, the difference largely disappeared after age 15.
I read elsewhere theorizing, that kids from more secure backgrounds will delay more likely as the delay has been rewarded in the past. Whereas, if every dinner is fighting over scraps, they will probably take the initial marshmallow
The marshmallow experiment is less about whether children are able to delay gratification, and more about whether or not they trust adults to deliver on the promises they make.
While I wouldn't want to attribute either cause as being more or less, it is a n interesting confounding variable that I wonder who the original and subsequent research accounted for it. Especially since it also applies elsewhere in life. For example, investing money is delaying gratification, but it is also a question if you think you will actually make money which is not guaranteed.
>this tendency towards saving, the ability to delay gratification, is present relatively early in childhood, and has strong predictive effect on success in life
This really resonated with me. As a child I use to eat my food "in order", saving the best part for last. Now I'm thinking about all the instances where I've delayed gratication in my life. I've always saved money at an above average rate but never really made this connection before.
>Perhaps this implies that no matter how rich society gets, there'll always be people who just burn though whatever they earn. This would partially explain why people in poor countries like China and India are still able to save a greater percantage of their income than people in western countries who earn an order of magnitude more.
What's the connection there you're implying [1]? I would think that the higher (capacity to) save is an artifact of peer pressure/ecosystem effects. If a frugal person is still expected to have a big house, or else be seen as weird, that imposes a constraint that forces a lower savings rate than they prefer.
It's a hard Gordian knot to cut, but once everyone expects normal people to pay a certain expense, you can get stuck in that kind of bad equilibrium.
[1] between "some people always burn through everything" and "people in some poor countries have higher savings rates than in rich countries"
Unfortunately you can´t really do much with magnitudes of money - it´s all about the relative price level. Working in Silicon Valley with 6k/month income, and 4k/month housing expense makes you significantly worse off than the person with 4k income and 1k housing expense living in the midwest, say, who is consequently much more able to save. A similar comment applies with respect to comparing absolute prices between countries.
I am not the OP, but I do play games. And I tend to hoard the hell out of everything I find in the game (especially in RPGs). And I do tend to have a lot of unused inventory by the end of the game.
At the same time, I don't do well with money, I eat out too much, drink too much, make impulsive purchases (mostly gifts and hobby related things, but still) and generally do not watch my budget very carefully.
I don't think video game experience translates very well into real life. In a game, going through tough fights without using any healing or other expendables feels like an extra challenge, going through life without going out for beers or a diner date or without wasting a couple of hundred bucks on a fancy VST plugin or a cute RC toy for some friend's kid does not feel that way.
Seconding. I too always ended RPG games with inventory full of stuff I opted to save for actual emergency and not just some final boss. But it didn't translate to real life - I'm not exactly an impulsive buyer, but not all that savvy with money either (my current personal finance strategy is ensuring I spend less than I earn, and trying to increase how much I earn). In the past, I've experienced running out of money while being so burned out I could barely hold a job, and I vowed to never live through it again.
I think games are too different than life. Having saves changes a lot; e.g. I can refrain from using a powerful healing item in a fight and try to micro or luck my way out instead, because if I fail, I can reload and try again. I've noticed that in roguelikes, I'm more likely to use items - those games are harder and have permadeath. Also, in modern games I'm also more eager to use collected items, because the experience these days is so streamlined that I can rely on the game to provide me another powerful item just in time.
Life, unfortunately, doesn't have saves, and is not balanced.
You haven’t fought that boss in real life that made you use half of your inventory and you still died which turned you into the video game hoarder you are today. Once I came close to homelessness I realized I too must hoard my money.
I almost always wind up finishing up games with a huge pile of resources left over. It's only natural; even hardened adventurers need to keep their retirement in mind while saving the world.
I've had to force myself to use that ammo/elixir/etc. because I'd do the same. Playing something like DOOM (2016) where you're constantly swapping between weapons due to ammo running out helped. Or play everything on hard
I really appreciate this analogy - it's a new way to look at things and it probably is right.
I like playing real time RTS games and if I'm not spending everything (i.e have a lot of villagers and spend resources) it means I'm not optimizing enough. In real life, that is sort of where I am now.
Related. One day you'll be dying. And you'll have a whole lot of savings you didn't use. Fun you could have had. Will you wish you'd spent it, or will checking out with money in the bank give you pleasure in itself?
My theory is that some people has an innate ability to be happy without spending much money. They don't travel much and don't eat expensive food ... and that's just fine for them.
On the other hand, some (most?) people NEED lots of money to be happy. Their nerve systems are just low-efficiency in terms of how it is capable of converting a chunk of money into happiness.
Something to always consider - all of that unused cash at the end is something you didn't do during the game (your life) that you probably could have benefited from.
Unfortunately I don't have a death star to destroy every planet in the solar system. If I can't take them with me why can't I at least watch the biggest fireworks ever? So much wasted potential...
I rarely spent a dollar in video game economies, but I attribute that to most video game economies not rewarding it well. It’s hard to design that, because players can find themselves out of cash and that might create dead ends if it’s necessary.
Though perhaps the Sims or tycoon games suggest otherwise. I was always running broke in those.
I grew up in North Georgia where the rural and ghetto areas are poor, not middle class, and everyone has a subprime loan. It usually goes like this: you run up your shitty interest rate credit cards on car repairs to get to work, you come across this refinance service that will pull your 3-5 1000$ credit cars into one payment and reduce what they're paying by 80-200$. They're excited and don't even notice that it's 20% interest for 5 years. They realize after a while but they just say that they'll refinance once their credit score has improved after building their credit. Their car has another issue and now they have more credit card debt and a subprime loan.
I know you think it's mostly middle class but I grew up in dirt poor white ghettos and I could write a book on how many people make this mistake. Surviving sucks.
Your capacity to absorb financial speed bumps today is (among other things) a result of your income level yesterday.
I am often surprised how people whose income is the same or greater than mine live in stress, because each extra euro of income is immediately translated into an extra euro of consumption, and there is no reserve for a rainy day.
However, I am not surprised when the same thing happens to people with incomes much smaller than mine. Sometimes I am instead surprised how these people manage to survive at all. (Well, obviously, if I'd ever got in the same situation, I would probably gradually learn a few tricks I don't know today.)
Most people I know who make less than $50k a year and are between the age of 19-25 have better money management skills / perception of money than my peers making $100k and up.
Many have similar social lives, I think it boils down to perception and realizing what it's really like to go broke. Most people who don't come from means know the emotional / mental value of not freaking out about money constantly, while those who come from money or just spend like there's no tomorrow seem to feel like buying out to their ego's delight will lead to a life they want. It's bizarre to watch. Some of my friends think it's normal to have $40k+ in credit card debt or $80k+ in student loans and still have a $100 gym membership and blow money like crazy. Again, bizarre to watch.
In the datasets I use at work, I'm seeing these or similar credit not for emergency solutions, but rather for luxury consumption (the very poor aren't likely to be in our panels).
People are buying Peloton bikes, exotic vacations, and luxury purses, and hoping to pay that debt off in installment plans.
I worry about when enough people hit the tipping point where their monthly minimums on deeply depreciated goods are too much to be able to make.
Whoa, they are buying purses and vacations on these loans? Can you characterize the loans for me -- how much, what interest rate, what % of defaults do you see? I'd be very interested in a detailed analysis, that sounds very important.
At least with the peloton purchase, it sounds like they are using Affirm. Generally if you have good credit, interest rate is zero. I've seen it on other high ticket items for sale online. In this case Affirm reduces the friction of buying higher priced products.
The phone I'm typing on now was financed through symphony credit. Zero interest, and 36 monthly installments. I'm sure there are penalties if I don't pay every month, but it's on auto pay.
That's not really what the article is talking about though.
That kind of loan is nothing new. My parents were buying furniture on zero-interest installment plans decades ago. They offer zero-interest financing as an incentive to buy.
The article is about installment plans replacing high interest payday loans, which is a whole other game.
How do they make money offering 0% financing on 36 month plans, let's say? Are they wagering that the cost of inflation/opportunity-cost of those dollars that the good people got is far outweighed by the benefits of people not paying on time? Seems wild that SO many of the customers wouldn't be able to pay on time...
I don't know - I have seen lots of zero interest offers - but never from Affirm. I have a 750+ credit score and last time I looked at Affirm for something (a glowforge I think), interest rates offered were above 21%!
They do, as I bought a Peloton using Affirm. I was ready to pay cash, but they offered to do an interest free, no fee loan thru Affirm and split it across a couple of years. So I did it, because why not?
I’m guessing this was probably an arrangement between Peloton and Affirm to where the former paid some fee to the latter, and all of that is absorbed as marketing overhead just to get more people buying bikes.
Correct any zero % rates are deals with the vendor. Affirm is just another predatory lender. Rates are sent to the user by who ever is giving the most kickback to affirm. Credit scores only give a yes/no on to next logic. My gf has just about zero credit history 690 and I am 790 we both get same offers at 18%
When the offer is $X now or $X/36 for 36 months, it's clear the seller is paying the financier, but that doesn't mean the seller will offer a discount for current payment.
Some do although, especially when you poke them about it. You see it often with cars where you offer all cash vs the %0 financing option, you can often get a discount that way. The $2000 in interest you were going to pay implicitly through the inflated price of the car goes away.
When the interest rate is zero it is because if you make a mistake and miss a payment, the claws come out and the penalty rate is high enough not only to pay for servicing all the loans which earn no money but also earn a profit. There is no free money.
There is a whole industry catering to people buying 'luxuries' on credit they can't really afford.
Over here in the UK, the main culprit is a company called Bright House. They sell new household electronics and other goods on credit at around 70% to 100% APR.
They exploit the rush you get when you buy something shiny and new. For a lot of their customers, it is the only way to kit out the house with new appliances and furniture. The ability to do that gives their customers a false sense of achievement and secuirity which is exactly what these lenders exploit.
I don't want to tut-tut the poor, but I do want to tut-tut consumer culture in general.
There are a whole lot of people who _should_ be able to afford an unexpected car repair bill, and could quite easily do so, if they weren't spending $100 a month on cable TV, $800 every other year on a high-end smartphone, $500/month on owning an SUV when a $200/mo economy car would serve just fine, etc., and put the money into a basic rainy day fund instead.
And a middle and working class that was just a little bit more frugal might create some downward pressure on prices that would, in turn, alleviate what less wealthy people need to pay on just the basics.
given that the average American spends 4 hours/day watching TV[1], that's well under $1 per hour of entertainment. There aren't a lot of hobbies or entertainment media that are cheaper.
I think the point was more that entertainment isn't really a necessity at all, even if its a 'good value'. If entertainment is in fact a necessity, most public libraries offer an immense amount of choices of physical and digital media available for free.
Nah, entertainment is a necessity, but that doesn't necessarily mean that any given choice of entertainment is a cost-effective choice of entertainment.
Just focusing on TV, for starters there's free TV over the air. There's YouTube and Amazon Prime Video and Netflix and CuriosityStream and Hulu and whatever your local state-supported TV network is putting online for free, there's DVDs from your public library, etc. etc. No, these options won't let you catch the latest Game of Thrones episode as soon as it airs, but they'll keep you entertained.
If you really want to get nitty-gritty about it, there is at least an interesting thought experiment you can run where someone who's both living paycheck to paycheck and paying for a sizable cable TV package has, intentionally or not, chosen, say, ESPN over financial solvency. Because that cable TV bill could be converted into a steadily growing rainy day fund.
Just because it's cheap doesn't mean there aren't cheaper alternatives. Most people could easily replace that with a netflix subscription for $13, since they already have an internet connection.
Yeah, but then the cable companies will charge you anything over 1TB. And if you have more than 2 screens, because of kids, it will add up, so the cable company will relax that cap IF you also buy cable TV. Remember cable companies are assholes.
> if you have more than 2 screens, because of kids, it will add up
I download and seed hundreds of GB's a month of torrents and run a couple cryptocurrency nodes in a household of 4 where everyone uses youtube, netflix, and spotify often and we've broken 1TB once in a decade..
Meanwhile, some roommates and I hit 1TB in a week in a 4 person household. After quickly switching to an unlimited plan, some data accounting showed almost 80% of that came from the three game consoles playing online (fast connection = you're always the host in Destiny 2 apparently).
What I'm saying is YMMV. I bet you'd see different results if one or two of your housemates turned on 4K on youtube/netflix.
Let's assume we devote 70% of the 1TB cap to streaming (netflix, youtube, etc.). This leaves 300GB for anything else, which be more than enough. Using netfilx's highest bitrate for 1080p, we get 268 hours of content for 700 GB. At the highest bitrate for 720p, we get 518 hours of content. Dividing that by 30 days, we get 8.9 and 17.3 hours per day for 1080p and 720p respectively. 8.9 hours split among two screens (one for kids and one for adults) might be tight if they don't have anything else to do, but 17.3 hours sounds more than enough if the kids are in school and the adults are employed full-time.
It only counts as cheap if the value of those 4 hours/day of sedentary activity is greater than $4. Many would argue that it is not. But I understand you're saying that relative to other forms of entertainment it's "cheap", I'm just questioning the price relative to the value of the product itself.
Also, I know a lot of people argue that watching TV can maybe relieve stress in some way, or allow them to "wind down" after a "long day" at "work", but I'm not sure you need to wind down for four hours (not saying you are saying that).
Almost everyone I know who considers music a hobby ends up spending a pretty good penny on it once they really get into it. It can easily be one of the most expensive hobbies someone has (it is for me at least). Once you've learned the basics, half of the fun is collaborating with others or recording.
Costs:
- Instruments & accessories (serious guitar players often have at least one acoustic and one electric - and good quality ones are going to be at least $500, but could go way higher. Other accessories: at least a metronome and tuner, potentially also some pedals, amps, drum machine, etc)
- Renting/owning/traveling to a practice space if playing in a group
- Educational material: Lessons, Books, sheet music, music apps
- Recording / mixing equipment
Sure you can get a used acoustic guitar and watch youtube videos to learn it - but I don't know many people who do that and stick to it.
The real up-side though, is that decent musical gear doesn't lose a ton of value over time unless it gets broken or stolen. Also, if you're not professional, you can pace out your purchases.
My personal collection grew over 10 years, and is just for amateur use, jamming with friends mostly. I've got a couple guitars, bass, keyboard, 2 banjos, amps and mics. When I add up everything I've spent, it was probably 2/3 the cost of 10 years of $100/mo cable. I wasted a decent portion of that cost on a few other instruments I never played and ending up giving away as gifts to friends though.
Most hobbies have a cost and time length of enjoyment and thus you can determine how much you are spending per hour of enjoyment.
Movies is like $25 an hour, though skipping concessions and going to a cheaper theater can bring it down to under $10 an hour.
A short video game (assuming full price release day) is like $7 an hour. (Cost is higher if you play games less because the upfront cost of the system is split over fewer games).
A long video game is goes from $2 an hour to $.50 an hour, and can go much cheaper for games you enjoy for extremely long times.
Books for me are around $2 to $.50 an hour ($20 book that last 10 hours to a $10 book that lasts as long). Libraries make all of this much much cheaper if you have one.
I actually read a lot of web novels/fan fiction which are generally free and thus my only cost is for the internet access that I'm paying for anyways.
Sports can be a lot harder to measure because there is a large variance in the costs depending on numerous factors, but I would assume they aren't that much cheaper (though generally much healthier for you).
I find art, especially for anything that is above crayola level brand, is quite a bit more expensive. So for kids it is cheap, but for adults who spend any serious amount of time in it, the costs go up pretty fast.
So in comparison, $1 an hour for TV isn't bad, but it is filled with ads. So many ads I personally refrain from TV.
library books are essentially free. They pay dividends if you read something that imparts a skill instead of being brainwashed and dumbed down by TV you pay for.
And once people realize that and begin to change the consumer culture, that's when the next market crash happen and 10% of all workers get laid off.
Saving is opposite of spending, when a lot of people spend less, they'll also earn less, some more disproportionately, this cycle continues until its a great depression.
You can start from a high saving society to a high spending society and enjoy years of boom, or you can jump of a cliff - 70% of US economy is consumer spending, as in, most everyone's salary is supported by that. You can't save when you are jobless.
For people who must rely on these loans, the pay for this class of jobs are too low. Your financial picture I think is mostly a myth. There is this grey margin where the jobs pays enough for minimal living expenses, but not enough any sort of long term holding or advancement with regular variation of cars breaking down, or health issues, or funding further education, or a basic vacation which everyone deserves. Society can only decline long term when more and more jobs only pay in this twilight threshold.
The problem with any line of thinking like this is that this deals with the core human nature of self agency versus pre desposition to certain things.
While it seems like common logic to someone that has the ability to live cheaply and save money, the more important thing is someone emotional response in this situation - that person actually feels good about saving. Something like this is not intrinsic to human development, and is usually acquired through the persons upbringing.
So when a person that makes little money decides to buy a high end smartphone, its not because they are doing it out of stupidity, they are doing it because they need to feel the same positive emotion that the former person feels. And as long as they can get by day to day, they are not incentivized to make any changes.
The discussion to enact change needs to start with answering this question - how do you effectively "reprogram" someone to value delayed gratification over immediate gratification?
I live in Fremont, CA. I think if you live in a nice 1-br apartment, it might take half your budget. But if you take a bigger place and roommates, it should be doable.
80% of people live "paycheck to paycheck" whatever exactly that means. (count me among them)
Very few of them actually need to. It is possible at any income level to spend less money than you make. People don't tend to make those choices though and unfortunately prices reflect this - for a lot of things, especially housing, prices rise to whatever people will pay – if everyone is willing to pay so much for housing that they can't save much at all, well the price of housing raises so everybody does that.
You can choose to not live paycheck to paycheck but it means making different choices about where you live, how you entertain yourself, and how you acquire things. This is applicable at the highest and lowest income levels.
People should be thinking that in order to afford a car they likewise need to be able to afford its repairs, but instead of buying a cheaper car and saving some for eventual repairs or maintenance, people just consider the acquisition cost and buy their max.
I am among these people despite a tech job in the bay area I live mostly paycheck to paycheck as a result of several choices I've made, and I don't necessarily regret all of them but at the same time the situation definitely frustrates me.
This is a very american thing. I'm french and live in China, what you're describing is really foreign to me.
I'd say "most people" save a lot for retirement and their first house buy, "most people" live way below their salary max, "most people" would slap you for considering a consumer loan.
What happened to you guys to go so deep in the hellhole to not even see it's madness to live that way...
Looking at the numbers, it seems French household debt to income has actually surpassed American (both around the 100% of disposable income) in just the last few years. French ratios have been gradually increasing for the last 25 years and American has been falling for the last decade.
One factor is Americans have significantly higher disposable income and can service more debt.
The culture is really different, and frankly, it's not a clear cut 'this is simply better' thing. China had trouble expanding their domestic market because people just save the money they earned instead of spending it on things.
If, in aggregate, people are saving more than they're earning, your economy is necessarily shrinking on a per-capita basis (or your central bank is injecting money into the economy and your "savings" is being inflated away). If you're not investing in some creative act, you're taking capital away from everybody else.
If over time, you change the way you measure inflation[0], to manipulate government bond rates and Social Security payouts[1], then it's not surprising you end up with a world where inflation is not directly related to central bank actions.[2]
Meh, I think it has more to do with central bank actions being so far removed from buying eggs at the grocery store that the macroeconomic effects are just not very tightly coupled with specific actions. People aren't making different decisions w.r.t. the cost of capital and banks giving loans aren't giving riskier loans when interest rates are lower - the risk and the interest have little coupling at all. So central bank actions are only having effects inside the very navel-gazing financial industry that is moreso playing its own game than interacting with the outside world.
That is, central bank actions' effects are being hidden by complexity that will take time to shake out. Interest rates and bailouts and the like are only affecting a certain tier of society and it will take a while for those waves to spread to the rest of us.
Exactly, as much as loans and savings go, they don't physically alter the currently available resources to be consumed, which really has nothing to do with money at all. A society can't just collectively save most of its income for it to be magically available at a later date. It's just suffering deflation while exporting inflation into the future. It's some sort of prisoner's dillema that high-saving countries usually run into.
Thank you, people don't acknowledge that simple point of logic often enough -- debt is a mindset.
Really what we need is a culture of saving, but a part of me feels that many people in our culture find that extremely difficult because billions of dollars are spend every year on propaganda designed to try to get us to spend more (read: advertising).
For an economy, too much saving is as much a problem as too much debt. We're all just paying each other to do things and acquiring capital just to have it past the point where you need it kills jobs and concentrates wealth away from people less fortunate.
> Very few of them actually need to. It is possible at any income level to spend less money than you make.
My anecdata certainly doesn't back this up, so I'm going make you cite.
Most of the people I know who are in trouble are generally there due to medical costs. If we had universal healthcare in the US, I would be more receptive to your statement.
> Instead we should be looking at ways to make it so that giant unpredicted expenses don’t happen at all.
Or maybe fix it from the other end: reduce inequality so fewer people are living paycheck to paycheck and can actually build savings to use for unpredicted expenses.
I’m sorry but this is a ridiculous, unactionable answer that is functionally equivalent to “well we should make things better”. Yes of course we should, HOW? We need more innovative solutions to these problems.
I like seeing electric bicycle shares, I like seeing community-based, high density housing with shared kitchens and bathrooms, I like predictive diagnostics and telemedicine (although the FDA is fighting it).
Look at how society works in countries that are better than your own at this. What is the fundamental differences in politics, media climate, labor market laws, health insurance education. Then vote for a politician or party that tries to improve things in that direction.
I don't think there are technological quick fixes. The solution to "people live paycheck to paycheck" I think is e.g. improving employment security by e.g. not having healthcare tied to employment which keeps people in low paying jobs. Ensuring everyone can organize so employers pay more, and so on.
The two democratic front-runners have solutions for this:
* strengthen union membership (union jobs pay an average of 13% better for the same work, and that's with union membership at an all-time low in the US),
* reduce the ability of money-holding industries like these people to extract so much (like what Elizabeth Warren's CFPB has been doing, even with current meddling from the administration),
* contain costs for the most expensive things in American life (health care -- some sort of universal coverage plan, and education -- student debt forgiveness and cheaper education options),
* raising the minimum wage (which, had it tracked productivity in the US and not left unchanged since the 90s, would now be something like $20 an hour)
that's off the top of my head.
Andrew Yang has his "freedom dividend" which, the more you get into the weeds, the less of a benefit it'll seem to have, but that's even another idea.
These are all ideas floated in opposition to the current administration, which wants to weaken unions, keeps fiddling with even the shitty Obamacare to take health care back to the bad old days, and so on.
So, people are talking about it, and have plans drawn on what other countries are doing more successfully -- no real reason they wouldn't work here, except for the historical baggage and pulling-up-the-ladder that dominates US political discourse.
There's no need to put people in dorms with shared bathrooms and kitchens. Yeesh. We have plenty enough wealth to house people better than that and not even notice the cost.
How is that yeesh exactly? They’re building these right now in Tempe Arizona, and NOT as dorms for college kids. I absolutely would have loved living in a building like that during my early 20s.
How about paying people more? That's pretty actionable. Jeff Bezos doesn't need 100 billion dollars. "Just get rid of unexpected expenses" is the one that sounds ridiculous to me.
I think you, I, and even Bezos would agree that he doesn't need 100 billion. Which is why he doesn't have anywhere near 100 billion dollars. He has ownership stakes in companies that have been estimated to be worth 100 billion dollars (it would be impossible to liquidate for anywhere near that valuation in practice, however)
Net worth is not the same as resource allocation. This isn't the 1500s where you could plunder a castle and pillage their stores of grain. Bezo's net worth has very little to do with the distribution of housing, food, and medical care to poor people.
Does he consume more housing, food, and medical care than average? Absolutely. Are his consumption levels even remotely similar to his absurd net worth? Absolutely not.
It's actionable by passing laws that limit the upside executives can extract from capital investments and raise minimum wage on large business. There will always be unexpected expenses, so you have to pay people enough to be able to save.
Much better than making people dependent on those who control the mechanisms for allegedly limiting unexpected expenses; that's just a plan for increasing social control available to elites. High density housing with shared kitchens and bathrooms sounds like a dystopian hellhole designed to strip people of their dignity, and that's something you think is a good thing? We already saw tenement buildings in the 19th century.
I think that falls under the umbrella of limiting the upside executives can extract from capital investments. It's not an either-or proposition, though. Minimum wage or something like it is needed to make sure that money goes to workers rather than shareholders.
How exactly do you think limiting upsides is meant to help the bottom? Tall poppy syndrome has never been an effective policy for helping the bottom. It’s strictly about taking down the rich.
You can argue about taking down the rich (they have too much power, your jealous, etc), but don’t for a second pretend you’re doing it to uplift the poor.
And what mechanism do you propose? Just a 100% tax on any gain over X%? Do you realize how easy it would be to then just sell at that threshold and invest in something else?
> People have been trying that for 100 years or so. So far it hasn’t worked.
We didn't even have the minimum wage 100 years ago in the United States. How are you going to deride people for not offering solutions, then, when they offer viable solutions, attempt to magically will-away history?
These ideas aren’t new. The idea of taxing the wealth even more is ALSO not new, and we already have tried it and had it fail. (France has tried this, as well as other European countries, with usually disastrous results).
People aren’t dying in the streets because Bezos has 100 billion. Pointing to rich people is just a distraction for people who can’t do math.
Even if you could magically trap all of them in the US and wealth tax them away, it’s a meaningless drop in the bucket. Seize all of the money from everyone with 50 million+ in the US and you don’t even have enough to pay for Medicare for all.
Politicians have only been trying the bare minimum needed so they can continue enjoying benefits provided by lobbyists and keep the pesky annoying people (population) off their backs. It's hard to enjoy a life of luxury when you have people asking you to do your job and represent them.
History is replete with the sudden removal or transfer of "private" property [1,2]. I'm not saying that this is good thing economically or morally, but when people get mad they vote for Hugo Chavez or whoever. I think this is highly unlikely in the US right now: in a "how many divisions does Jeff Bezos have" argument, I'm pretty sure you could make a case for the answer being "greater than zero" given regulatory capture and general financial/corporate influence on government.
> I’m sorry but this is a ridiculous, unactionable answer that is functionally equivalent to “well we should make things better”.
Your argument is that no one should have a conversation unless they have an action plan.
> I like seeing electric bicycle shares, I like seeing community-based, high density housing with shared kitchens and bathrooms, I like predictive diagnostics and telemedicine (although the FDA is fighting it).
These are all solutions for companies to make money from problems that could be solved by government-provided healthcare, better public transit, and subsidized housing (not just projects).
I'm assuming the person involved knows of such micro loans and hasn't fully considered the costs and benefits that went into making them. I've covered for others before knowing I wouldn't get fully reimbursed because maintaining the relationship is worth the few dollars I lose a few times a year. Interest free unsecured micro loans which often aren't even paid back in full.
But I wouldn't scale this up. I would lose more money and wouldn't be benefiting any existing relationships by doing so. The social benefit of the few dollars lost does not scale, and thus the reasoning behind existing unsecured microloans to friends does not scale.
Just utterly unable to process "reduce inequality" being "ridiculous, unactionable". blhack, google something called "left wing politics", it's something that's been around for a while, but evidently not everyone has heard of it.
Reducing inequality is a completely orthogonal. Taking everything from the top 1% doesn’t fix poor money management skills.
Additionally, there are many middle class folks making well above average that still live paycheck to paycheck by living beyond their means (huge house, multiple cars, etc).
Poor money management != poor and more money does not fix it.
Maybe instead of pointing out how foolish, we can positively encourage good behavior, and tell them "you can do it!", and be a true friend, encouraging them to manage finances better. For example, we should all have some emergency savings, then build our savings, and sacrifice conveniences or fun as needed to get out of debt. We would do well to create a culture of not being victimized or manipulated so much by advertising, and helping one another in that.
Resources include anything by Dave Ramsey (including possibly used books, DVDs, audio CDs on amazon: we bought some of these for ourselves, and to loan or give to children and others; no other affiliation), or free full BYU personal finance courses online at: https://personalfinance.byu.edu/ (I have not personally reviewed but some relatives have taken the actual classes and recommended this link.)
(Maybe I should add those notes/links to my web site, for more easily referring people... Edit: The above, combining freedom + chances to learn responsibility, is far better IMO than letting the federal government run more of our lives, badly, and without giving a choice what to do with those $.
I have written more on that at http://lukecall.net under Other then Politics or such. )
(Edit: fixed a couple of links.)
I agree we should be teaching more financial literacy, but I think this, and most of these financial literacy courses, gloss over the realities of poverty.
An emergency fund is very important, but most people in poverty live in the red perpetually. There is never extra cash to save up. Any extra money is swiftly gobbled up by debtors who wait indefinitely for any money to show.
Which is actually one reason you will see some poor people make seemingly ridiculous purchases as soon as they get money. They know from experience that any extra cash on hand will get taken by creditors as soon as they detect it. So they spend it. At least, if you buy something of value, you can pawn it for cash later when you need it.
And there is more at my web site. I have spent a great deal of time thinking about all these things, and writing. I have learned some things for myself.
(edit: a correction: the "development counseling" appears to be for Church members. The "immigrant services" and many other things like those online materials, classes done with the NAACP are not limited to Church members: https://providentliving.churchofjesuschrist.org/immigrant-se... . Etc.)
Interesting, as a member myself, I hadn't heard of the immigrant services program.
And I agree, the poverty cycle is of course not inescapable. But boy is it a lot harder than I think those of us who have always been more fortunate think it is.
Just to confirm I am not making things from a standpoint of $ given to us: My grandparents were either both legally blind (one side, very poor and kids stressed out), or rather poor (especially compared to most americans today) farmers in Mexico with 13 children. The "privilege" I have enjoyed (other than skin/benefit of the doubt?--unsure since I probably don't fully understand that from everyone else's perspective: just acknowledging I don't know everything) is encouragement to work hard and that I could do it, during my whole upbringing. My dad was a school teacher (and part-time painter and newspaper deliverer) and my mom a full-time mom (stressful, but it sure helped us as kids to feel secure). Things were hard, but on we go, and I am grateful. Maybe rambling now.
Encouragement to work hard and that you could do it is more than many, many in poverty get. 2 parents and the ability for one to be stay-at-home is also an amazing privilege.
Also, did your parents ever ask you for money? Because that is also a very frequent thing in poverty. Very needy parents that will be asking for, even expecting money the minute you have a little bit.
My dad found me simple employment at a very young age (delivering newspapers), which let me buy my own clothes, school stuff, etc. (edit: No, they didn't ask me for money. But you bet they would get it if they did.) But he also helped me in college a few times when $ was tight. But we had extremely frugal life habits, that came from the farming/broke years. And we prayed a lot, did what we knew we should. Additionally, we paid tithing, which has real promises of specific blessings, and we received those (we always had what we needed). I have learned for myself and now know God lives and answers prayers, which helped us much, and still does. More at lukecall.net .
(Edit: Actually, my parents still live frugally so they can help other people. I don't recall eating in a restaurant until I was a teenager on a date (though it probably happened, just very rarely); we had a garden which supplemented our food budget for a large family, television was not a key part of the lifestyle but chores were (it seemed my dad was always working some helpful task for the family, except on Sundays), we often bought clothes secondhand, and we knew we were loved. The advice I have given above and below in various parts of this discussion is what we did, and I never, ever felt deprived. Food was generally homemade (cold cereal only on Sundays; Mom learned to cook mostly after marriage, but they both learned very well IMO--I salivate as I think about it), we ate a lot of wheat and beans (but not only), some bought in bulk to save. And we were very blessed, again, praying daily as a family and trying to do what we knew we should. There are people who can help with individual situations, and much good advice at the sites I have linked. But the blessings of God are what I credit the most, by far. Again, more (skimmable), at lukecall.net, a simple site with no sales or javascript.)
(We were/are far from perfect, and yes life has big challenges, but we definitely are trying, and we know what direction we should be pointed in. There is peace, direction, and connection with God available to those who want it enough to act and keep trying. My email contact is on that web site for further questions; am happy to try to answer. The more I think of it all the more I am grateful.)
If you make little enough and live in a major metro area its pretty easy to burn through any savings you have. I have several friends now in their 40s now that used to continually cycle the steps of: lost job -> spent savings -> debt -> got job -> payoff debt -> generate savings -> lost job -> ...
At some point they just lost hope. I can't blame them for racking up debt if the system lets them continue. It sounds better to continually pay off debt and enjoy life instead of to continually pay off debt and not enjoy it.
I am not selling anything (maybe some software someday, but that's a different topic). But I think about things like this a lot and have posted many thoughts, over time. I hope you don't mind but this is my best work in this area, so far, over some years.
(Truly, we do not need to be alone, or give up. I have been thru many things that ... leave me grateful now. So I hope this can be useful to someone....)
No (but I can see why you ask). It is my simple attempt to share info that helps people. I have put a lot of work into it, and each part seemed relevant to the discussion (which is what motivated me). It is easier than posting the notes every time. Again, there is nothing for sale there.
If you look at the material and have suggestions for how best to answer questions without pasting long paragraphs I have already put elsewhere, or other suggestions, I appreciate that.
Maybe an alternative could have been to make one page with all those on it, so just one link (but I was getting tired). :)
Edit: Another way to see it is: I have a lot to say, but rather than put it all here, I link to it, when it seems relevant and like it could be helpful.
While I agree with your point around how loan programs work with the poorer parts of our population, the headline explicitly states:
America’s Middle Class Is Addicted to a New Kind of Credit
I think in the case of the middle class, it's not really about survival, it's about living below/at/beyond your means, and whether these loans are doing too good a job of masking the real costs.
I read a report recently that talked about payday loans. The issue is that the people who take them out are likely to default a lot so the rate has to be high. Most of these companies make almost no profit.
Now, my first thought was good! They are so predatory. But what the report talked about was that in that case, these people still need the same amount of money and instead turn to loan sharks and organized crime which put them in an even worse position. At least with a payday loan, there is bankruptcy courts to protect them and no one is physically harming them or their families. I hope I never end up this desperate but it is a more complicated situation than it first appears.
The old adage is true, being poor is expensive. This is largely driven by transportation issues. They can't get to the wholesale club or save enough to buy in bulk. Instead they buy toilet paper one $3 roll at a time at the local CVS or bodega.
>The issue is that the people who take them out are likely to default a lot so the rate has to be high.
When you see a 100% interest rate loan (assuming no fees) then it basically means that banks lose 50% of the money they loan out and 50% of borrowers are paying their loan on time and have to cover the other 50% by paying twice as much.
> Yeah, they know the loan is bad. They probably don’t have any other options.
I think it’s a pretty poor assumption to assume all the people taking out these loans understand exactly what they’re getting into, and what other options they may have. I think there should be a mandatory 20 minute education session for anyone taking out a payday loan/installment loan.
I think his point was "what other options do they have?". The cost of for example not fixing their car is infinite, so they'll accept anything to get that fixed.
A friend of mine was hooked on subprime loans (from what we call a 'doorstep lender' in the UK). Not great sums in principal but leaving him always cash-poor and in need of another loan as he cleared the preceding one.
I explained to him about 0% credit cards and how, since he'd never defaulted on a loan, he would be certain to get one.
He used his new card to clear his existing debts and has been paying off the balance over the past 12 months (he has 18 months and could move to another 0% easily enough, if need be).
He really didn't believe a bank would give him so much free credit since nobody had ever told him so.
The good news is that he has now filed a complaint against the original lender and is likely to be refunded most of the interest paid over the years plus statutory interest of 8% p/a while he waits. It's going to be around £9,000
Why? Because he was unemployed all that time and they shouldn't have been lending to him.
> I think there should be a mandatory 20 minute education session for anyone taking out a payday loan/installment loan
I've re-read that sentence several times now and each time it makes more sense. I'm not sure how it could be deployed in practice, but the notion that before you do this there's some level of attainable, reasonable education you have to absorb first would be useful.
A 10 minute lesson before signing up for a loan that explains exactly how it works in a simplified format might make up for the systemic lack of financial education throughout formalised schooling. Might. Would certainly be interesting to see it happen/interested in helping it happen.
School when kids are young is a better forum for this IMO. It's appalling the lack of financial education in schools. But I guess knowing the capital of some obscure country I will probably only hear mentioned 3 times in my entire life is more important.
> cheaper transportation options, cheaper access to healthcare or preventitive care, predictive diagnostics, etc.
I'd also add teaching financial literacy/strategy in school. A lot of mistakes could be avoided. I learned the hard way and it took a long time to dig myself out. There's a lot that would've been very useful to have known earlier.
Do we not do this anymore? When I was in high school almost 40 years ago, there was a class/classes that taught things like balancing a checkbook (go ask your parents), keeping a household budget, how interest works, and the like. I didn't take that class (kinda wished I had), so I don't know what it was called.
If we don't, we should. Especially now that we're all responsible for our own retirement. With nearly every job I've held in the last 20 years, I've been one of the "financial geeks" to ask questions of, and it is astounding the amount of ignorance we collectively have and yet are supposed to understand the shit that gets thrown at us by our 401K plans. I don't blame the individuals for their ignorance, hell, I make a hobby of this stuff and I'm still lost sometimes. But don't just thrown 'em into the deep end, have a class or two in high school because everyone is going to have to deal with some aspect of finances.
My understanding is that no, such classes are uncommon in American high schools these days. I went to a public magnet high school in the 2000s and I can't recall any such class being offered.
As for most financial topics, I don't have much of a mind for it, so I would greatly benefit from a teacher. I need to be taught it, it's very difficult for me to teach myself finance. So I've simply erred on the side of heavily saving so at the very least I have a year or two of buffer.
Theres literally no education about personal finance in high school. And I went to a fancy high school, graduated in 2018. College too. The only thing I've seen is the Wells Fargo booth at the yearly club fair trying to sign up new students for credit cards.
And we wonder why so many americans live in poverty. Yeah the system is far from perfect, but I think basic classes in high school would be a great start to the problem, and could change the issue of generational poverty.
I was required to take a class like in high school 10 years ago and it was called consumer economics where we practiced balancing our checkbook (ironically since i've never even written a check), learned about 401ks, taxes and other stuff. This was in a Chicago suburb for those wondering.
Hardly anyone learns finance in public schools today (not even in my time); its better to keep people ignorant than to teach them how taxes and interest and banking work so you can easily fool them into believing what you want them to believe and make do what you want them to do. Teaching financial literacy should start early and never let up.
For me, I had a business partner that screwed me over and left me with a lot of credit card debt. I took out an installment loan of $20K at 6.5% interest to pay down the cards.
It's saved me a lot of money in interest and has been of great value to me.
It also caused my credit score to shoot up over 100 points because I didn't have such high balances on my cards anymore.
I would hardly consider it predatory. I for one am glad they exist.
I realise some people are in a really tough place, but if someone can afford the extra expense of paying off the loan, from their current income, then they could have afforded the expense of saving the same amount.
Unless their income literally increased by the amount of the loan cost, just before the additional expense hit them, the situation was avoidable. The fact is a lot of people on low incomes do not see any benefit from savings and don’t prioritise it.
That might be for rational reasons, their life circumstances are different from mine, but I don’t understand the logic. A branch of my family are significantly less wealthy than mine. When my uncle, the main breadwinner retired, his sons blew a big chunk of the retirement lump sum on luxury holidays for their families, of the sort my branch of the family would never consider. I think one of them has a mortgage and the others rent. It’s just bizzare. So many decisions they make in their lives seem actively self harming, but they do have jobs and support their families. They’re by no means destitute, but seem to actively avoid choices that could improve their lives. There’s something going on and I don’t know what it is. Maybe a lack of hope, leading to living in the moment? I don’t know.
No, we need to figure out ways to help people make better decisions, and giving poor people money doesn't seem to help. It's like the old saying that there's a difference between being broke and poor - broke is liquidity problem, poor is a state of mind.
"Our results also do not support the hypothesis that financial strain by itself wors- ens the quality of decision-making. Even though there are substantial differences in financial resources before and after payday for our samples of poor US households, we find no evidence that the quality of their decision-making, or being prone to heuristic judgments differs across the before-payday and after-payday groups."
Sure, but wouldn't be better for most people in this situation to simply default on their current debt, that take on these 150% loans that will bankrupt them just as well 2 years later.
> Sure, but wouldn't be better for most people in this situation to simply default on their current debt
You say that, but, in a year or two when your rent has gone up so far that you have to move, you're looking at awful credit. Then how do you get into an apartment where they do credit checks and they see you've got awful credit. Those apartments will either charge an arm and a leg in security deposits, or deny you.
That's a hit to your pride. Who wants to give up like that? And in more practical terms, how does that help with your problem this week? Now you have a broken car and zero ability to get non-predatory credit.
It also might be worth looking at setting up funds for people to take interest free loans for emergencies. They can set up a collateral in return to ensure payment.
Not an expert at all in this area, but if people are interested in statistics for people's financial habits, the Federal Reserve's most recent "Report on the Economic Well-Being of U.S. Households" [1] is useful.
It's a survey of about 10,000 people and, as far as I can tell, is the source for many claims like "40% of American adults cannot meet an unexpected $400 expense". That statistic in particular is consistent for the past few years.
There are also many other interesting statistics:
* 17% of adults are not able to pay all of their current month's bills in full
* 20% of adults had major unexpected medical bills in the last year
* Among young adults, hispanic people are twice as likely to attend for-profit colleges than white people, and black people are five times as likely
* Half of those who attended for-profit schools would change their choice if they could; a quarter of those who attend other schools would
Seems like addressing the costs of medical care and education would go a very long way.
That’s valid, but financial education is quite bad in US. It shocks the mentality of most people, in particular low income. Many buy $4 coffee, fancy shoes, big TVs, yet they complain about not being able to pay the credit cards. Sorry, I’m foreign, but that’s what most other visitors I’ve met think.
I feel like the government should be offering some type of non predatory debt relief comparable to this. This service is only a detriment to the borrower due to the crazy high interest rates, but I think the government could break even with much more reasonable interest rates, consumers would be better off financially, and the predatory industries would disappear since they can't compete.
> I feel like the government should be offering some type of non predatory debt relief comparable to this.
Just want to point out the fact that US government-backed student loans are non-dischargeable through bankruptcy. You will have that albatross around your neck until you pay it off or die. This is the ultimate predatory loan and it's provided by the government.
Thats's kind of what the UK, for example, does with student loans – you only pay them off as a fraction of the part of your income above a threshold and any debt remaining after 30 years is simply forgiven.
The solution to bad credit can't be more credit -- people will (and do) just take the credit, waste it, and then seek more credit.
A better solution is to allow discharge of private debt so that lenders put more effort into validating debtors. If a creditor want to get money back from a debtor, they need to put the effort in to validate that the debtor has sufficient assets to pay it back and isn't paycheck-to-paycheck buying highly depreciating products.
If you need to buy a house or a car on credit, you can. For almost anything else, you don't need credit unless you have an (usually illiquid) asset to back it -- a slowly-depreciating asset like a house or car, or a steady job.
If you want a loan for a business, the creditor is on the hook for your default. Perhaps they'll insist on keeping your funds under trustee in escrow so you don't waste your loan on a luxury car and WeWork.
And while we're at it, term-limits on secured loans that cannot extend much beyond the depreciation of the loan-enabled purchased.
There's no reason that non-dischargable debt has to be arbitrarily easy to obtain.
No debt besides student loans is truly undischargeable. Historically it seems like it was pretty easy to avoid paying, for better or wose; unfortunately, now judges are more likely to set up unreasonable payment plans and to hold people in contempt for being unable to meet those plans.
That this has not received more attention is troubling -- debtors prisons are illegal, and this is de facto creating a debtors prison. And that is often the only legal test required. That no one who can change the situation cares is indicative of societal rot.
I'm not entirely sure what FHA did to the housing market, but as for student loans, yes it wasn't a great outcome, but it is a substantially better outcome than everyone being in debt with high interest rates with predatory lenders.
Except that student loans can't be abandoned even if you declare bankruptcy. That one little factor makes them some of the worst loans imaginable in terms of long-term prospects.
the tradeoff is insanely low interest rates. Without the federal backstop student loans would have the interest rates of credit cards because as soon as new graduates get into the workforce, can't find a job, they'll file for bankruptcy to get out of the loan. Managing that risk without a backstop means incredibly high interest rate to cover for the losses of loans lost in bankruptcy.
No, it's not a better outcome than if the market was private because frankly no one would graduate with $150k in debt for a degree in basket weaving if private lenders were backing the loans. A well regulated private market would prevent the extreme situations that we are seeing today.
You can make a (somewhat legitimate) argument that we shouldn't require young kids to major in subjects that result in good paying jobs, but on the other hand you wind up with the mess that we are in if you don't.
The status quo cannot go on. I'm in favor of either fully privatizing the system again, OR fully socializing it. In either case, the government would absolutely not be backing loans anymore.
> No, it's not a better outcome than if the market was private because frankly no one would graduate with $150k in debt for a degree in basket weaving if private lenders were backing the loans
People get private loans for bullshit degrees all of the time. Lenders don't care, because private student loans are non-dischargeable.
No, it would mirror the European experience. Essentially just capping the cost of tuition, fees and room/board and subsidizing the schools to an extent to make up the difference.
I think that would be a terrible idea. The gov't would want to make the debt non-dischargeable like they do with student loans. It would be devastating.
Maybe we could try to actually tackle things like medical costs so people aren't getting so deeply into debt to begin with.
> I think that would be a terrible idea. The gov't would want to make the debt non-dischargeable like they do with student loans. It would be devastating.
I fail to see how this is worse than current predatory loan scenarios.
Why can't the government just regulate the parameters of lending? Isn't that sufficient? Why does the government have to actually get into the business to help solve the problem?
These companies wouldn't be profitable, but other companies that are founded post-regulation could be. Companies have a remarkable ability to mold their business models around regulation.
Example:
An investor issues loans for $100k at $1k each. He charges the legal 30% interest to make $30k profit / return on his money. However, 30-40% of the borrowers default and these are unsecured loans. He makes 0% return. He stops offering these loans and now these people don’t have the access to these credit facilities.
This is the market at work. The reason the rates are so high is that the market put them there. These are high risk borrowers and many will default. Lower interest rates would result in a negative ROI. Tax dollars should not be subsidizing defaulted loans.
Is there no money in financial education...? I feel like there's no controversy in suggesting that the state of personal finance in this country is a disaster, even for people who are highly educated (how many tech workers actually understand how their startup options work?)
I just wonder what a viable business model would be for quality personal financial education or resources.
A Khan academy for personal finance would be great. Investopedia is a cool resource, but for the financially illiterate, it's pretty tough to understand the wealth of knowledge there.
What's HN's opinion on 0% balance transfers? Yes, there's usually a 3% fee but... I've been able to borrow about $5k-$12k for a one time 3% fee over 18 months multiple times in a row now. I make sure to always pay the balance back before it is due. Why don't more people who need a cash infusion do this?
Well keep in mind, to a cash strapped individual that "minimum required payment" line is very attractive. a $3k loan can turn into a decade of "minimum required payments" that sum to well over $3k without even touching the principle owed.
But minimum payments are super low, so you can store the cash somewhere high interest and pay most of it back in a lump sum. If cash is 2% right now, your minimums might be $90-100ish a month, and the rest can wait till month 12. Theres little to no incentive to pay it off early except to lower your utilization.
A 10,000 3% loan over the course of one year equal payments has $147.00 interest. A 3% transfer has $300, but your balance in month 12 will be 8846, which is like $80 back in interest if you save those what would be monthly payments until the end. Under this math, a 3% balance transfer is equivalent to 4.5% APR one year loan.
I don't think there are any savings accounts with >= 3% APY right now. How could it ever be profitable to borrow money at a higher interest rate than you earn by holding it?
Or, if "somewhere high interest" refers to the stock market, then you risk not being able to pay back the loan in a year.
A balance transfer is a one time fee, not compounded monthly or daily. You pay 3% up front, and then theres no benefit to paying the loan off early, except for holding a lower credit card balance.
What I am saying is, is that IF you are taking a balance transfer, to accurately compare it to a traditional, monthly compounded loan, you need to account for the minimum payment differences (the balance transfer will be 5x-10x lower) and then calculate the interest that extra cash not paid back to the loan can net you.
I am making a counter argument to the claim that a 3% balance transfer is equal to a 5.5% apr loan, i think its closer to 4.5% if managed wisely. Its closer to 50% higher, not double.
This is why I said "be careful" ;-). Someone who thinks that a balance transfer offer is easy math may not be making the best financial choice. As you point out, managed carefully, that can be mitigated.
Because the fee is paid upfront, and this is assuming you make equal payments each month for 12 or 18 months. Compared with a loan that charged normal interest it would only accrue on the current balance, and the interest you pay each month goes down as the principal goes down. If you had a 12 month balance transfer and made only minimum payments, then paid off the lump sum at the end it would be lower APR.
I had a feeling this was the case. I didn't realize it because I've been getting them in one degree to another since I was very young (~19-20 years old)
I've strategically used 0% BT offers in the past. Agree if you need a loan it's the cheapest personal loan you can get by far. The obvious catch is that you need a plan to pay it off completely in 18 months (or subject yourself to nearly 30% interest, which is what the credit card company is hoping for).
The biggest downside vs a traditional installment loan is that having high utilization on a revolving credit line like a credit card has a much bigger negative impact to your credit score than having an equivalent balance on installment.
I used those "loans" to avoid taking out college loans. I still have around 20k but between p2 and me I can move it every 15-18 months to a cc that doesn't even have the 3% fee without consequence. I know I'm not really their target market for this but I love it.
I'm banking (no pun intended) on a strong economy which makes banks happy to lend out free money. as soon as the economy sours I'm gonna be hard pressed to find anyone offering this. Truthfully I could pay it off now, but why should I?
I try to keep myself in as much 0% APR debt as possible, almost at 100K. It’s all on business cards that don’t report to credit bureaus so it doesn’t impact my credit utilization. Instead of balance transfers (which have a 3% fee and a low limit) I put my quarterly taxes on my CC, which you can pay for 1.8%.
Could you elaborate on this? If I started a business (LLC), I could open an AmEx card card under the business and have access to a 0% line of credit? That doesn't sound quite right. I'm surely missing something.
The card is still under your name, the application will pull your credit report, and you're personally liable for the debt.
However most major banks (with some exceptions) do not report business cards to the credit bureaus unless you're in default, so it's possible to carry large balances without any impact to your credit.
I downvoted you because this is not true. 0% offers end with the interest rate spiking. Mortgages have extremely low rates right now. All you'd have to do is carry that 0% offer past its expiration for a short time to make up the cost difference.
It's absolutely less risky for a number of reasons:
1. If I default on my credit card debt it will screw up my credit but the banks can't come after any of my assets. If you default on a mortgage it will screw up your credit and the bank will take your home.
2. I am free to take on the level of risk that I'm comfortable with, including risk free options such as treasuries or CDs. With a mortgage you are locked in.
3. I am free to mitigate my risk by diversifying across asset classes. I can put some money in gold, some in real estate, some in Japanese equities, etc...
With a mortgage you are leveraging a huge chunk of money and concentrating it in a single undiversified holding. If a disaster strikes and the insurance company doesn't cover it your wealth is wiped out. If property values decline and you need to move you're wiped out.
If your intent is to pay off that balance, and more surprises don't keep you from doing so, then you'll have won out. But if you get complacent and think of it as the new normal that you can keep rolling, it will eventually catch up with you.
Of course the way the feedback cycle of the economy is set up, if you don't get into trouble with debt, someone else will.
If the business model is to use an internet app to run a payday loan operation targeting low-income poor credit borrowers it is unethical in my option.
It is the dark side of the internet.
We need to work to build communities where people are not as vulnerable to this type of scarcity.
For more information on this topic see the book: Scarcity: The New Science of Having Less and How It Defines Our Lives
This seemed to be a very vague article. I'm assuming that people that take advantage of these loans must have quite bad credit, or otherwise they'd be going the LendingTree/LendingClub option, where you can usually get medium term personal loans up to about $20k at under 10% interest?
People don’t think in APR for small dollar loans they think in nominal terms.
Also - loan origination/servicing costs have a nominal floor - it costs the same to originate/service a $50 loan as a $500 or $5000 one, necessitating what would appear to be a abnormally large interest rates.
Clickbait headline is referring to "online installment loan, a form of debt with much longer maturities but often the same sort of crippling, triple-digit interest rates"
I interviewed recently at Fig Loans - they are working to dismantle the predatory payday loan industry. Only in a few states at the moment, but doing great things IMO
This is exactly the sort of company the article is about - the APR on their homepage is 190%. Maybe that's better than payday loans, but its still predatory and unscrupulous.
I'm torn on this, I don't know what the break-even rate is on such a loan, but it must be quite high, because the default risk is high.
Let's say 150% APR is exactly the break-even rate for this kind of loans to high-risk borrowers, would you say a company writing 150% APR loans is predatory?
Obviously it is an atrocious interest rate. But what is the alternative? Unless the government or non-profits step in the make loans at a loss (or hey, direct cash transfers) to the poor, the alternative is no access to credit at all, which is strictly worse.
This smells of The Copenhagen Interpretation of Ethics to me:
"The Copenhagen Interpretation of Ethics says that when you observe or interact with a problem in any way, you can be blamed for it. At the very least, you are to blame for not doing more. Even if you don’t make the problem worse, even if you make it slightly better, the ethical burden of the problem falls on you as soon as you observe it. In particular, if you interact with a problem and benefit from it, you are a complete monster."
I'm shocked that an economy based on the median person being in debt is finding new ways to get debt into everybody's hands.
This topic is ultimately just a symptom. Focus on the larger economic design (eg rent treadmill) that precludes most everyone from saving a positive amount of wealth, rather than their needing to take on debt for emergencies.
Exactly. Sure, some of the customers of these products are simply mismanaging their finances, a great deal of them are simply not getting enough value for their labor. How do we get to a form of capitalism that works for all people? Not an easy answer for sure.
Why should society be bailing out the banks who loan money to folks who cannot afford it then turn around and bail out people who borrow money and cannot afford it ?
If you are broke file bankruptcy and reset your life. Quit trying to steal tax dollars
Please don't start flamewars on HN, and please don't perpetuate them. We've had to ask you this before, and even warned you that we'd ban you if you kept doing it.
If filing for bankruptcy had no negative consequences I would agree, but that isn't the case. I agree that we shouldn't be bailing out banks, but we should have a safety net to bail out individuals. People go broke for various reasons, but the hallmark of an accomplished society is being able to ensure a decent quality of life for most people. Telling people to accept personal responsibility for everything that happens to them is a huge cop-out. You're basically saying you refuse to consider what scenarios might warrant this because it doesn't fit into your world view.
Conversely if overextending yourself for whatever reason had no consequences, it would be to your disadvantage not to overextend yourself. How do we determine who should be "bailed out"? Seems the issues that are unavoidable that could cause ruin (illness/disability) should be addressed at a higher level than borrowing money with no recourse.
I have no issues with socialized medicine. In fact the fact remains medicare is actually the one functioning health insurance we have because the govt sets the rates that can be charged.
Unregulated healthcare is silly since people dont have a choice about their health ( not discussing the food choices )
Health is going to become a bigger problem once we reach a point in the development of our medicine when we could literally heal anyone.
Right now government-subsidised healtcare works because keeping yourself healthy simply can not be externalised to the government. But what if I could spend the beat of my years being a coke-snorting socialite hoping to meet someone at one of those parties who would make my life?
20-year alcoholic? Let us grow you a liver for the total of $2M of taxpayer’s money.
Bankruptcy is the safety net to bail out individuals. If you find yourself with too much debt to ever escape, regardless of how much it is and (mostly) regardless of how you got it, you get a reset button to wipe out all the debt you can't pay. The only negative consequences of bankruptcy (beyond the fact that it's not free to file) are the ones caused by the fact that it's the safety net; it's embarrassing to be forced to take it and lenders will judge you for needing it.
What are the negative consequences of filing for bankruptcy for the individual? If you're at the point where bankruptcy is recommended, it's only up from there.
They are either discharged of their debt or able to protect a house thru a payment plan.
Might have trouble finding an apartment. The lowered credit score will probably cause increased costs for things like car insurance. Life insurance may be a no-go. Employers in some industries do credit checks, too.
It's a good option in crushing debt, but it's not without significant mid-term downsides.
Bankruptcy will eventually improve the score. It's not instant, and may substantially worsen it in the short term. Some organizations that do credit checks may also have a "no recent bankruptcy" policy despite accepting lower credit scores.
Not everyone's way behind at the time they declare bankruptcy, either. We did it because six figures worth of medical debt was ceasing to be juggleable, and disability approval (and back pay) looked to be years out still. Credit score was largely fine at the time we filed.
I agree, bankruptcy is an unfortunate solution for unexpected medical debt, as it impacts ones consumer credit score. FWIW the GP comment was referring to "banks who loan money to folks who cannot afford it" which implies baling out consumer debt instead of filing for bankruptcy
Yes, people go bankrupt for various reasons. Some reasons are more-or-less outside your control (medical costs being number one), many are at least partially within your control.
When you say the government should bail out individuals, you're saying that I should pay for someone's gambling addiction, someone's lack of effort in finding a job after graduating from university with $150K in loans, someone's inability to manage their credit cards.
It's one thing to help people who are in need, something else entirely to help people who are in a bad place because of their own poor decisions.
> Disagree, You make the choices for life. Accept personal responsibility.
Most people do accept responsibility.
This is the problem:
>In the decade through 2018, average household incomes for those with a high school diploma have risen about 15%, to roughly $46,000, according to the latest U.S. Census Bureau data available.
>Not only is that less than the 20% increase registered on a broad basket of goods over the span, but key costs that play an outsize role in middle-class budgets have increased much more: home prices are up 26%, medical care 33%, and college costs a whopping 45%.
>To keep up, Americans borrowed. A lot. Unsecured personal loans, as well as mortgage, auto, credit-card and student debt have all steadily climbed over the span.
Companies don't give (adequate) raises. They return money to investors. So, every year, the middle class is losing ground.
These people are desperate. You can mock them all you want, but they're out there building your home, making sure your utilities stay on, deliver your produce to your favorite store. They're trying, but the economy is taking advantage of them.
I'm pretty sure it's explained by the description of "Company gets money through directing employee labor, but an uneven portion of it is given back to shareholders instead of employees".
aka being employed is a worse deal than being an investor, disproportionately.
> What is stopping them from starting the business ?
Resources, obviously. If someone is screwed enough to have to reach for pay-day loans, that indicates they don't have enough resources. Likely their other credit lines are maxed out and their social support nets are either completely dissolved or just as illiquid as the prospective borrower is. So they can't invest any starting capital into the investment.
The second most important resource constraint they're going to be met with is time. Balancing commuting to work, keeping up the household, and full-time work of at least one job leaves you with an amount of time at the end of the day. Maybe they could invest that time into acquiring more marketable skills, but, hey, your lease is up in two months, and you just got the letter that inevitably tells you your rent is going up. Better start driving uber, trying to grab more hours, or doing whatever you need to to cover that new income gap that you'll be facing.
> What is the answer ?
There is no answer. You don't get conclusions when you're living in poverty in modern America. You just wake up every day and it's somehow worse than the day before.
> Why do undocumented workers come here for the opportunity ?
Because the United States has a bad habit of bombing their countries, killing their labor leaders, and destabilizing their economies through forced privatization and resource extraction.
Now you have started talking about the real issue. IMF , world banking , Federal Reserve.
The folks who can p00f money into existence from nothing (QE) then loan it to you so you have to work to pay back something they imagined into existence.
I’m going to assume that you’re young with limited life experience, which allows you to think that life is that clear-cut. I’d argue, but experience tells me I’ll have to wait until life decides its your turn to stand in front of the steam roller.
A much less charitable interpretation has you making convenient answers so that you can conveniently wash your hands of social responsibility. But, man, I hate think that about anyone, even anonymous internet commenters.
Please don't cross into personal attack in HN comments. You did that upthread and then did it more here. That's the wrong way to go. Please review https://news.ycombinator.com/newsguidelines.html and eliminate that kind of swipe out of your posts here—regardless of how wrong or annoying you feel another commenter is being. Maybe you don't owe them better, but you owe this community better if you're participating in it.
Abusive drunk family, plenty of legal issues as a child, ran over by a drunk driver, ( flatlined 3 times in ICU for a month and disabled ), divorced 2 times, 2 kids, married again, adopted 2 kids, worked my way into silicon valley, now I do ok
cliff notes of my life. Judge me all you want but what I have learned is life is a fight to the death. You can lay down and let it run over you complaining about how the deck is stacked against you or you can do the best you can.
Your choice. I have and will continue to help those who I see fighting the good fight but I have no empathy for quitters.
It’s uncharitable to have a disdain for those without empathy when a large component of success is luck?
If you think success is guaranteed with grit and hard work, you are woefully misinformed. You can do everything right and still fail hard. “Personal responsibility” is a dog whistle for the willful ignorance of the necessity of government regulation and social safety nets.
Just like the rich didn't get rich entirely because of their own abilities, poor people didn't get poor because they chose to. Placing the poor people in an environment where there are better education, better healthcare and better career opportunities always results in better financial decision making. So the society bears most if not all responsibilities.
How can we eliminate poverty if it's entirely personal responsibility? Let me quote Mandela on this:
>Like slavery and apartheid, poverty is not natural. It is manmade, and it can be overcome and eradicated by the actions of human beings. And overcoming poverty is not a gesture of charity. It is an act of justice. It is the protection of a fundamental human right, the right to dignity and a decent life.
>Like slavery and apartheid, poverty is not natural.
This is absurd. Man in nature has no house, no car, no money, no tools, no storehouse, he can eat only what he can catch, kill or forage for. Everything we have in civilisation was built by people working hard to escape the poverty and brutality of nature.
We can go into the debate of how much inequality is healthy for a society to encourage innovation and hard work. However in many parts of the world and even U.S. I would say many talented and intelligent people didn't even get the chance to work hard to earn something because the society didn't provide them such a chance. Your personal experience is moving but the reality is many people are rich not because they worked hard and many poor not because they were lazy. Those (extreme) inequalities are a result of injustice. If a society is too unfair, that will surely discourage people to contribute to the society.
Why does this seem to only apply to the poor and not the rich and wealthy? When a company takes illegal action to pollute streams and gets a slap on the wrist, or investor kickbacks result in worse and worse wildfires in California, where's the personal responsibility?
When it comes to loans and bankruptcy we're expecting people to suck it up and live under the thumb of debt for the rest of their lives for the fall of needing money to pay rent, go to college or deal with medical bills.
I've been through enough shit myself that I have plenty of empathy for people with no choice. Calling them 'quitters' (in reference to your other comment') is absolute nonsense and simply a way of rationalizing FGYM.
You started and perpetuated a flamewar in this thread. Those are extremely lame discussions that we try to avoid here. Would you please stop and not do it again on Hacker News?
I dont mind society creating allowances but the US has went too far and created barriers to small businesses with all of the disability requirements. I have many friends with small businesses that would like to start their own shop but the toilet requirement alone is almost 100k in up front cost.
Ask not what the US can do for you, but what you can do for the US.
Isn't this the exact same scenario you're claiming? Your friends should take personal responsibility instead of asking the government to bend to them. No?
(I'm trying to understand your logic here and how it applies to multiple circumstances. I think they're incongruous here, but I don't understand why.)
Your parents are only legally required to care for you up until your 18th birthday. Their function as a safety net may end at that moment. Plenty of folks have shitty, abusive, or neglectful parents who wash their hands of their children at the first opportunity.
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But for MOST people, the cost of fixing it is functionally infinite. They literally do not have even a few hundred dollars to, for instance, replace a tire.
Yeah, the interest on these is predatory, but then what are these lenders supposed to do? Many of the people getting these loans WILL default on them. Yes it would be great to offer these loans at a reasonable interest rate, but they are unsecured loans. The only collateral is the clients credit score.
It’s easy for all of us with our comfy tech jobs to hate on these, but to me that feels like kicking the poor while they are already down. Yeah, they know the loan is bad. They probably don’t have any other options.
Instead we should be looking at ways to make it so that giant unpredicted expenses don’t happen at all. That means cheaper transportation options, cheaper access to healthcare or preventitive care, predictive diagnostics, etc.
It helps nobody to point out how foolish the poor are.