Thursday, December 11, 2008

FIGHT BACK!

Don't let banks and other financial institutions push you around!

In America, many people are afraid of banks and other financial institutions. The reason for this irrational fear is the misconception many folks have about banks - misconceptions that banks would prefer that you have.

Movies, television, and literature all perpetuate these myths. Chief among them is the idea that banks are all-powerful and that they control all the money. Individual citizens, it seems are reduced to begging for a pittance of this largess.

For example, in the movie, "Catch Me if You Can", Christopher Walken plays the part of the Father, whose irregular bookkeeping has resulted in an IRS audit. He is forced to close his business and beg for money from the banks. "They have all the money" he says, ruefully, and they won't lend him any.

I would suggest that once you take this attitude that the bankers have all the power, money, and control in any situation, then you have already mentally and monetarily surrendered to them.

The reality of the situation is that no bank, no matter how large or how powerful, can survive without customers. This simple truth often eludes many people. Banks can, on the other hand survive without bad customers, and they certainly don' t need or want customers who cannot pay back a loan or constantly default on payments or overdraw their accounts. If you fall into this second category, well, then yes, the banks hold all the cards, but only because you've given the cards to them.

If you find yourself in dire financial straits, when it is too late to turn things around, as happened to the character played by Christopher Walken, then yes, the banks have all the "power" and you are screwed. But even then, sometimes someone completely in debt might find they still have a "hole card" to play. But more about that later.

The first thing to maintain in a banking relationship is the upper hand. By this, I mean you have to be a customer in good standing - with a balance on your accounts, regular payments on your loans, and no history of overdrafts, late payments, etc. For some folks, this sounds incredibly hard to do. And, they might argue, that circumstances "forced" them into a situation where they were in financial trouble. However, if you look at how events progressed, you can see oftentimes there were early warning signs that trouble was coming, and that they failed to take action early enough to avoid trouble.

In one of my earliest posts, Life in the Rowboat, I illustrated the model for personal finances using the rowboat analogy. Water comes into our leaky rowboats in terms of spending and expenses. We remove the water though bailing (income through work, usually) and if our work income exceeds our expenses, our rowboat is nice and dry. If the amount of water coming in (expenses) is more than the bailing (income), well, eventually you will be sunk.

Power-shifting occurs when folks don't notice that the rowboat is slowly taking on water and then fail to take action to stop the flood. They start to get used to having a little water in the bilge (outstanding debt), and think, "Well, all boats leak, so this is normal." As the water starts to rise, they don't get too worried, as they think they can always bail it out later with a more powerful pump (pay raise). However, once the boat is nearly under, it is often too late to take action.

When that occurs, then yes, you'll find the banks are in the position of power, and you are basically screwed. So one key to maintaining that position of power is to keep your own financial house in order. It makes no matter how large or small your rowboat is, if it is a tight ship and fully afloat, you are the captain and in charge.

Once I started getting my finances in order, I noticed a funny thing. When I went to the bank, they started treating me better. It is an old adage that in order to get a loan, you have to prove you don't need the money - and it is true. Once you have money, it is far easier to make more money. Loan interest rates are lower for folks with money. And interest rates for savings are highest. If you have money, you can easily make money. As Warren Buffet says, "The first Billion is the hardest".

The contrary is also true. Once you "fall off" the financial table, you 'll find you are charged the highest rates for loans and earn the smallest rates of return on your savings. It is often a death spiral. As I noted in my Understanding Credit Cards article, once you have a high balance and a late payment history, the banks will zing you with interest rates so high that you might never pay back the balance. And if your credit is bad enough, other banks won't loan you the money (at a lower interest rate) to pay off the balance. You truly are screwed.

If you have good credit, and a bank tries to jam up your interest rate, you can simply close that account and take your business elsewhere. Even if you have a balance, you can transfer it - provided you have good credit. However, if you have a history of bad credit, then you have no power, and are "stuck" with whatever terms the bank dictates.

For commercial borrowers, the scenario is even worse. If you have a commercial loan, say, on an office building, it is on what is called a "callable" note. That means the banker can "call" the loan at any time, for any reason, if they do not feel secure on the loan. And you have to either pay off the balance due, or be in default. And since it is a commercial property, you could be out in the cold in as little as 30 days.

For businesses, bad news often accelerates into worse rather quickly this way. A company misses a loan payment or bounces a check and suddenly, a note is called, and a business that was on sound footing one day is bankrupt the next. So it is vitally important to stay on the sunny side of the money street. Once you fall off the financial table, you lose what little power you have in the relationship.

If you pay your bills on time and have good credit, no bank can push you around. It is as simple as that. If one bank decides to raise the rate on your credit card, well, screw them, you can transfer the balance elsewhere and close the old account. They need your business to survive. If you stop charging with your credit card, they don't collect those credit card fees and they don't collect that nice credit card interest.

If you start to see the water rising in your personal financial rowboat, the time for action is NOW. If you let the water lap over the sides, you've surrendered all control to others. Taking action may mean minor steps - cutting expenses or selling assets, which often means swallowing your pride and taking a loss. Or it could mean refinancing debt at a better rate (slowing the rate of leakage) and putting a plan in place to bail out that accumulated water. At the early stages, you still have the power to do this, and banks will cater to your needs - and you can stay afloat.

But once you are "swamped", it is too late, and you have no power or leverage to negotiate - except for the cram-down.

Cram-downs are a pure expression of power, and not everyone can do them. The most famous occurred in the 1980's with Donald Trump. Most people (mistakenly) believe that Trump is a wildly wealthy successful businessman. While he has some money and has had some success, he is not as successful as the Warren Buffets of the world. He doesn't do TV shows out of sheer boredom. The Donald probably needs the money.

In the 1980's his casino empire was melting down - he owed more money than the properties were worth, and the cash flow was not servicing the loan debt. Some poorly advised purchases, such as the Trump Shuttle (remember that?) were losing money. The sharks started to circle, sensing blood in the water.

Then Trump did a truly ballsy thing. He crammed down his lenders. He told them, basically, that if they didn't re-negotiate the terms of his loans, lower the interest rates and balances owed, that he would declare bankruptcy, and they would be stuck with pennies on the dollar. The banks balked at first, but with such a large gun to their head, they had to negotiate. Trump lost a lot of control of his projects, and some equity as well, but he survived to fight another day, and he forced his banks to take on a share of his losses.

Today, with the mortgage meltdown, some borrowers are doing the same thing. They are trying to negotiate with lenders to reduce rates and terms so they can stay in their home. In this market, the last thing a bank needs is another foreclosed property on its books. Banks typically lose as much as 50% on foreclosures, with legal fees, realtor's fees, as well as the empty properties sitting for months on end. If they can keep a loan on the books and avoid all that hassle, it is a better option for them to write-down some balances. Ans some banks are willingly renegotiating loan terms at lower rates, rather than go through foreclosure.

For some homeowners, a deed in lieu of foreclosure can be an option. If you can't afford to stay in your home and owe more on it than it is worth, some banks will accept your deed and forgive the debt, if you agree to move out right away. In many states, eviction can take months and months, and if a debtor declares bankruptcy, it may stay eviction indefinitely. With a deed in lieu of foreclosure, the bank gets the home without months of legal wrangling, and you walk away with your credit record intact.

However, if you have declared bankruptcy in the past seven years, these options may not be available to you, as is what happened to one friend of mine. Since you cannot declare bankruptcy more than every seven years, a threat to declare bankruptcy and screw the bank is an empty threat. In other words, you've surrendered that power again, and you are at their mercy.

Insurance is another field where people, particularly young people, tend to let themselves get pushed around. But again, it is all a matter of power, and you can surrender that power quite easily. When I was in my 20's, I drove as fast as I could everywhere, like most young men do. Pretty soon, I amassed quite a few speeding tickets and even an accident. I had bought a brand new car and borrowed the money to pay for it, so I needed collision as well as liability insurance. I voluntarily surrendered what little power I had in the relationship.

Getting insurance when you are young is hard. If you have a bad driving record, it is even harder. And if you have a car loan and need collision insurance, it is very, very expensive. The best thing a young person can do is to learn to live without and buy a car for cash, and do without collision insurance. If you can keep your foot off the gas pedal and keep your driving record clean, your insurance rates will stay lower and get lower faster. Until you are about 26 years old, your insurance rates will be rather high.

Yet most young people do the opposite, particularly young men. They buy the flashiest, fastest car they can find, usually one with the highest insurance rates. And since they drive it as fast as possible (and inevitably wreck it) they end up in the "assigned risk pool" - often paying thousands of dollars a year in premiums, sometimes more than the car payments themselves.

Again, insurance companies need customers in order to stay in business. But they don't need reckless drivers who are going to pay little and expose them to a lot of liability. Once you round the corner on 30, the attitude of insurance companies changes. Not that this means they still won't try to push you around, of course, if you let them.

As I noted in my Understanding Credit Cards article, you should know your interest rate, terms, and statement and payment due dates for your Credit card - the vital "stats" of this valuable asset. Similarly, for insurance policies, you should have your policy information handy and cross-shop your policies every year or two to make sure you are getting a good rate. Rates vary considerably among companies. Many insurance companies make it hard to keep track of your insurance by sending multiple and confusing documents, garbage documents, and so much data that you have little or no idea what you are paying for coverage on.

Coverage that you may think is mandatory may in fact be optional. Some agents automatically write in rental car coverage, roadside assistance (towing) coverage, and medical coverage, even if it is not required by State law. Roadside assistance is nice and all, but if you are a member of AAA (recommended) you'll find that it is redundant. Rental car coverage is also nice, if you plan on wrecking your car a lot. On the other hand, if you have multiple cars or other means of transportation (car pool, bus) then it may be an unnecessary expense. Don't fall into the trap of the "well, it only costs a few dollars a year" mentality - that sort of thing ends up costing a lot when added up across your entire budget.

Motorist medical coverage may be optional in your State. Oftentimes, the coverage provided is limited - $10,000 or less. If you already have health insurance, you are already covered for your medical bills. Paying a relatively large amount of money for a small amount of what amounts to be accident insurance is not a very effective use of funds. Figure out what you actually need, and you can save a lot of money.

(Car Insurance will probably be the subject of an entire future article).

Again, people who are not assertive will simply take what the agent recommends and not ask questions. If you take charge of the situation, you can save a considerable amount, and prevent junk add-ons from cluttering up your policy and driving up your premiums.

Taking charge of your financial situation requires that you be assertive and also work to manage your finances. It is not easy. But once you get on the positive side of the financial picture, it gets easier and easier, as you are in a position of power to negotiate with your bankers and other financial institutions.

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