| | Underlying Issues Behind Predatory Lending September 29, 2006 |
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What underlying issues are behind predatory lending, and how has this practice become so common in the United States? That is an excellent question. By discovering the underlying issues and causes of this practice the negative effects on society and individuals can be minimized and eventually the underlying issues of the problem, the root cause, can be cured. That will cure the symptoms of the problem which are, of course, predatory lending.
First a definition of predatory lending. Predatory lending can be any of several types of lending practices, some legal and some illegal, that take unfair advantage of the borrower. The loan shark that everyone has seen on TV and in the movies is a prime example of a predatory lender. The route cause of loan sharing is poverty and desperation. Someone who is poor and needs money quickly will go to a loan shark, borrow money, agree to an outrageously high interest rate and a short time to repay it, and in the end have problems paying it off with the threat of violence and other acts of intimation used to collect.
Another common form of predatory lending that is usually legal are payday loan companies. The underlying issue here is, again, poverty with lack of economic education added into the mix. Payday loan companies are frequented by people who have low incomes and generally have less education. They will write a check that is post dated, agreeing to pay a very large interest rate for a short term loan. When time comes to pay the loan back many times they are not able to do so and wind up owning much more money, starting a vicious cycle that continues. This situation is much like that acquired when using a loan shark, but without the violence or threats that are so common.
Closely related of course to payday loan companies are pawn shops and auto title loan companies. A pawn shop will hold an item and charge a high rate of interest on the lawn, using the item as collateral and keeping it when the loan is not repaid. An auto title loan company does the same thing, but holds a car title as collateral and will keep the car if a loan is not repaid. Both types of business are legal, but many people believe they are unethical and prey on the poor in society who do not have decent credit ratings and are unable to go to a bank or other lender when they need cash and tend to have lower paying jobs in the socio economic scale.
Many people believe that the best way to fight the underlying issues is through education. If when in high school students received instruction on how to figure and balance a checkbook they would understand that a person can only write a check for twenty dollars and expect it to clear if they have twenty dollars in the account. Also use of credit cards is, as the old saying goes, robbing from Peter to pay Paul. If people understand through education that in order to use credit responsibly they have to have a plan to pay the loan back and the means to do so, and that living within one’s budget is the key to economic success, then many of the underlying issues would simply solve themselves.
Simply adding a module to social studies courses that explains basic economic principles to students in an understandable manner could help many of them avoid the underlying issues that result in pitfalls, economic failure and poverty. The courses would not have to be complicated. Most economic principals are actually quite easy to understand when explained in a simple manner. Even politicians seem to be able to understand economics when a good economics instructor explains a situation to them. If politicians can understand economics, then high school student can as well.
Of course, one of the underlying issues that affects people and makes them feel they need more money is the materialism inherent in society today. In past years it was called “keeping up with the Joneses” and in the 1980’s a popular song highlighted the benefits of being a material girl. Today many families cannot make ends meet unless both spouses work full time. Changes in the economy mean fewer higher paying manufacturing jobs than in past decades and more jobs in the service sector , which tend to pay less in wages. One way of combating this and taking on an underlying issue is again education. Providing incentives and encouragement for those who have been displaced in their jobs by economic changes so that they can retain through educational institutions is a way of increasing basic skill levels and basic salaries, creating less of a need, if it exists, for those institutions that are accused of predatory and abuse lending practices. If a person receives a technical education and gains a skill, he or she will earn a larger salary and be able to make ends meet and live within a budget. This will take away one of the underlying issues, poverty, and eventually predatory lending will begin to fade away.
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