this is a good thing. all I see is that someone who would normally not have the ability to drive a BMW be able to enjoy the use of one - however temporarily. I do not believe I have the moral superiority nor the arrogance to determine what constitutes a "responsible" decision for another person, or make a value judgement for them without appreciation of their values, let alone forcing them on such a path. here are two parties - one who needs a car (and all the intangible satisfaction in excess of the basic utility that comes with it), and another who is willing to take extra risk on their capital for a bit more income. how presumptuous it is to stand between their relationship.
There is a moral hazard here, which has nothing to do with arrogance or superiority.
We have all sorts of predictive analytics and common sense that makes it pretty trivial to figure out that the 19 year old with no income can't afford 72 months of payments on the shiny new BMW.
But who gives a shit? The buyer is ignorant. The salesman gets paid to move the car, the bank charging usurious rates makes a profit for the few months the buyer pays, and the repo-man with the license plate tracking recovers the asset.
This is a problem, because none of these parties has any expectation that the counter party can fulfill the contract. That's a moral hazard, and arguably fraud. (Actually, if you are a private individual, it is fraud in most states! If you're a federally chartered bank, no problem) That's why before banking became a national industry we have usury laws. It's unfortunate that we have loopholes allowing states like South Dakota and Nevada to neutralize these laws.
Yes and no. I mean yes, there is a proscriptive world where we would tell people, 'sorry, you don't qualify' for reasons a, b and c. But there is also a world where those reasons mean that that tool is taken away from the poor, or at least the less financially savvy. Basically banks would turn more into an institution for people who have money and don't need a bank (financial institution).
Perhaps a middle ground could be requiring people taking out these kinds of loans to receive two hours instruction on the side effects of taking out these loans and delivered by a consumer advocacy group --but without advocacy bias. Let them make their decision at the end of the day and put a three day waiting period in there.
I'd argue that we lived in such a world until the 90s. When the big investment houses were partnerships with directors holding personal liability, they didn't pretend that 30% car loans were AAA paper. Dodgy car loans were often held by the dealer, and were sold for what they are worth -- pennies in the dollar.
And it isn't a tool for the poor, it's a funnel, draining wealth from people who don't have much to begin with.
There is a fundamental difference between a 30% subprime car loan, and the senior tranch of a portfolio of them. There is absolutely nothing wrong with building AAA securities from subprime loans.
You'll only get into trouble if you fundamentally misestimate the default probabilities. This is true for any debt instrument, however, prime or subprime, fancy or vanilla.
> There is a fundamental difference between a 30% subprime car loan, and the senior tranch of a portfolio of them. There is absolutely nothing wrong with building AAA securities from subprime loans.
We made bad assumptions regarding default probability. Analysis of internal documents has been done - even the "pessimistic" estimates were far less bad than what actually happened. That would have been a problem regardless of securitization.
Securitization didn't fix this risk, nor was it meant to. Regulators allowed banks to satisfy capitalization requirements with senior tranches of other banks, but not with the senior tranches of their own portfolios. This isn't necessarily a terrible idea - it reduces local mispricing risk (i.e., one bank's underwriters suck), just not global mispricing risk (everyone sucks in the same way).
Please allow me to share my experiences with you. When I was 18, I had not yet capitalized on any of my talents, and I worked at a Starbucks.
I took out a loan on a car, with a 27%+ interest rate. I grew up in a poor family and I didn't really know any better at the time. That is, I knew, but I had not yet developed the /discretion/ to act on that knowledge with sound judgement. So, I signed for the car.
Approx 2.5 years later I defaulted on the car. Truly, 100% my fault, of course. 3 years later I finally paid off the car, but that's only after I got a decent few gigs developing mobile apps. So, for a lot of my life I worked way more than I should have just to pay the upkeep on this car, because full coverage insurance is pretty high when you're young. Fast forward a few years and I haven't missed a payment in 3 years and I have an amex. So yeah, I learned from some mistakes. But did it have to be that way? Do I want it to be that way for future generations? No, that's what HUMAN PROGRESS is for.
I'm in the Army now. There's a law that protects servicemembers. Pretty much whatever debts you have when you join the military must have interest reduced to 6% or less. Also, if you look at a lot of state laws, the limit on interest rates before the loans are considered usury is around 6%... This is because of the general attitude amongst people that servicemembers should be treated well. Geez, wouldn't it be nice if everyone was exploited less?
It's a pretty safe bet to say that, anyone loaning someone money at an interest rate above 20% is basically robbing that person blind.
To posit that the other party is morally responsible for his own choices, and not the lender, is certainly correct. Caveat emptor is very common knowledge by now. The real question though is: is it for the greater good that we do this? Does offering predatory loans to inexperienced buyers who have not yet developed a strong enough will or learned enough about personal finance serve a higher purpose, beyond making oneself rich? Is making oneself rich, the ultimate goal in life, or is there something more important than that?
Sure, it's the buyers fault for purchasing. That doesn't make you a good person if you're that predatory lender, or the guy who invested in those bonds. It makes you someone who willfully exploited another human being's ignorance or inexperience for their own personal gain. Which in my book, makes you a pretty despicable person.
So I don't think we should take away the freedom of buyers to choose what they want. I think we should take away the freedom of sellers to behave in ways that is obviously not conducive to human progress and prosperity.
It sounds good in theory but you're still learning.
If you remove the market for 20% loans, then those people will not get finance for anything, ever.
A 20% interest rate merely reflects the reality of lending to people like your younger self. They have a habit of defaulting. So to recover the money, a higher rate needs to be charged. Thus the amount of defaults can be higher and a return can still be made.
While you may think'banning' high interest rates will lead to better outcomes, it most certainly will not. See drugs, prostitution, gambling, etc. prohibition on any activity forces the activity underground, and then when you default, it's not a black mark on your credit but a black eye or worse.
What does need to happen is that credit understanding happens in school, and that every single credit product comes with a simple worksheet to clearly spell out the cost of the interest over time, and the final payback amount.
Yes, lending, even at higher rates, is a net good for society. It allows people to achieve things they currently do not have the money for. For every kid who defaults there is a family who buys a car, gets to work and builds up their credit score. A 20% rate actually says that the default rate is not too bad, overall.
> A 20% rate actually says that the default rate is not too bad, overall.
It would for a standard loan, but auto loans are backed by the asset. At 20% it doesn't take long before interest catches up with depreciation and after that it's all profit - given the loan rates a good credit score can get you these days, ~15% above normal rates.
The asset behind the loan has little to do with the interest rate. That is a function of default rates. There is an opportunity cost when a loan goes bad - that money is earning zero percent - as well as the cost of foreclosure (repo man and legal work) plus the recovery value of a vehicle (or property). People who have defaulted on loans generally do not return the collateral in ready-to-sell condition, and any sales must be done at wholesale level, whereas the loan is generally for an inflated retail level.
The return on the performing loans has to make up for the non-performing loans and the costs of administration and recovery of bad debts. That is how a loan portfolio works.
I'm not defending the shady practices of predatory lending - but the action taken really has to be on the educational side for the buyer. The rates merely reflect the market conditions at the time, and are the wrong thing to focus on. There should be entire semester of schooling dedicated to understanding credit, seeing as it is something that nearly every school leaver faces sooner or later.
Money lending and overconsumption are as old as time itself - what is really needed is for people to develop the internal dialog of 'i can't afford that, forget it'
Why the hell should the poor be buying cars at 20%+ interest rates to go work at shitty jobs just to pay for the damn cars? It's a cruel joke perpetrated by profiteers.
You know what there should be? More BUSES. Oh man, what an idea. Lets build more public transportation! No, that's not profitable. Never mind, lets exploit people instead, because it's good for them.
However, let's look at the bigger picture to see if we can spot any unintended consequences of the policy you hint at.
Interest is the price of money. Quite literally, it is the price that a person pays for buying access to a commodity called money now, rather than some time in the future. It is the price that another person is paid for selling access to their commodity called money.
What you're essentially advocating is price intervention in a market. You're essentially advocating that the supplier of this commodity should give their commodity away at a lower price than the natural price arrived at by the market.
The control of prices in just about any commodity is generally a precursor to a complete disappearance of that commodity on the market. Price controls on food are the best way to ensure food will stop being produced, leading to empty supermarket shelves, famines, riots, etc. Soviet Russia had a tight hand on prices during the 20s and 30s, which resulted in mass famines killing millions of people. A similar story is now unfolding itself in Venezuela. Whether you approve of the moral outlook or not isn't the point, it is a mistake to let a moral outlook, any moral outlook, dictate the price of a commodity.
Price isn't just what you pay for something, it is a signal to the market of the relative scarcity of that product, and the necessity for the producers in the market to make more of it. That signal is essential for efficient markets, i.e. for markets to supply what we all demand. Think of the aggregate of all prices in the markets for all commodities as the neural signals that are fired off through your brain to enable it to function. Of course, that information is spread out over millions of market participants, but it is in aggregate much more accurate than any small committee dictating prices could ever model, whether they have the right moral reasons to do so or not.
You know, a lot of people genuinely believe in simply reducing the reach of finance. Usury laws are only a means. The ends are to make it possible to carry out economic life without debt for most of society, and to reduce the ability of the financial industry to generate virtual/paper debts that the real economy cannot pay.
Price control of commodities is not the same thing as controlling the interest rate on loans. No one is going to starve if they can't buy a car that is out of their budget. They will simply end up having to do something more practical, like getting a used car, riding a bike, or taking public transportation.
Errors in determining the price of money do have fatal consequences.
When interest rates jump from, say, 2% to 4%, in terms of cashflow this means a doubling of expenditure on a regular basis. If your mortgage was X per month, it'll now be 2X per month, which will immediately affect the expenses you have for other goods, such as food, utility bills, etc. If your business loan repayment was Y per month, it'll now mean 2Y per month, meaning you may not be profitable anymore and go out of business.
The mistake you're making is thinking money is a thing that exists separately from real things, a unit of account and medium of exchange.
Money is a product in itself, that enables humans to go forward and back in time (through loans and savings) in order to plan the storage and use of the wealth they've created or are yet to create. Without this function, no wealth is created but the tiniest subsistence-level kind.
So, determining its price makes all the difference between an economy that operates at subsistence-level, or one that actually functions.
