Monday, April 18, 2016

More Shitty Deals for the Poor - and Why They Get Them

Poor people are offered poor bargains.  They remain poor if they take them.

A reader alerts me to a recent Atlantic Monthly article about how finance companies are using technology to track and control the poor and their assets.  Using GPS technology, for example, a sub-sub-prime car loan lender can track where their collateral is traveling to, and then disable the car if it leaves a predetermined area agreed upon by the borrower.

Rent-to-own companies that rent laptops can disable the computer and "brick" it if the borrower doesn't make his regular payment - all by remote control and even automatically.

As you might expect, this sort of thing draws howls of protest from the Left.  The poor are once again being exploited! (tell us something new).  This is unfair and shouldn't be allowed!  Bernie Sanders, once he is anointed dictator-for-life should put a stop to this, as soon as he gets done "breaking up the big banks" using his mystical bank-breaking-up powers.

And I have to agree in part.  These are shitty deals, to be sure.   But no one is forcing these folks to take them.   And often why people take deals like this is that they have shown they have absolutely no self-control, no financial acumen, and have a need to 'have it all now' and pay later.

These are folks who complain about living "paycheck to paycheck" but yet have tattoos and piercings that cost them thousands. And likely have more than one expensive exotic pet. They have declared bankruptcy more than once, and have defaulted on a number of loan obligations in the past.  Their credit score is in the 400's - about as low as it can go.   They are a horrific lending risk, and as a result, no one will lend to them - on reasonable terms.

When lenders lend money to people, they hope to make a little more money in the long run, than they would buying government bonds.  So if you apply for a mortgage, they want to know you are the kind of person who pays back their debts and not the kind that is looking to dodge them.  They also want to know if you make enough money to service the debt and whether the collateral (the house) will be sufficient to pay back the debt (or most of it) should you default.

When I was a kid (meaning a big, goofy 20-something in America) I failed to understand any of that.  I thought lenders were being "mean" by not loaning me money to buy a new car, when in reality they just understood that I couldn't make the loan payments even if I lived with my parents and ate raman noodles.

And it is not hard to mathematically calculate this, using computers or even a pen and pencil.

When lenders lend in bulk, they try (in normal markets - the 2000's exempted) to set interest rates such that even assuming a "normal" rate of default, the bank will still make more money than they would have lending money to Uncle Sam.   In fact, that is why the financial market blew up in the 2000's - in a nutshell.   Since loans were being packaged and re-sold as investment commodities, it was easy for lenders to fudge the numbers on the borrowers to make it appear the loans were solid and could withstand a normal amount of default.  But with "nothing down" and "liar's loans" as well as "payment optional" the normal checks and balances (and calculations) could not be performed.

Since we live in a Capitalist society, there are lenders who will lend money to people with less-than-perfect credit scores.   As in any mathematical model, you can adjust the cost of the loan based on the factors above - the credit score, the collateral, and so forth.    Since a group of such "sub-prime" loans will have a higher default rate, the interest rate (and fees) will be correspondingly higher.   The borrowers are, in effect, paying for the malfeasance of their fellow sub-prime borrowers who do default.

Eventually, there reaches a point where borrowing on such terms becomes so onerous that it is financially impractical.   Yet many "poor" folks feel they have no other choice.   "You have to have a car" folks say, "in order to have a job!"  And maybe that might be true, but there are a lot of poor people who seem to "have to have" a fancy car and have to live 50-100 miles from their place of work for some reason.

Once they sign the papers on a sub-prime auto loan, well, they are caught in a treadmill that will last the rest of their lives, if they don't find a way to get off.   A lot of 20-somethings, myself included, fall into this trap.   Since you have shitty credit, you are offered shitty credit terms (loans with interest rates of 14% or more).   And if you do stupid, impulsive things, like speed, you get tickets and your insurance rates go through the roof.

As a result, the poor end up paying more for a used car or an econobox, than the middle-class pays for a nice new minivan or SUV or whatever.   And the more you try to borrow, the further and further you fall behind in the game.

In a way, these GPS tracking devices are a way of ameliorating risk for these sub-prime lenders.  Remember that value of collateral is one factor in the loan equation.   And for sub-sub-prime borrowers, the risk of losing the collateral is very high.   Many let insurance coverage lapse, which means if the car is wrecked, the lender loses the collateral (and the borrower doesn't feel obligated to pay for a wrecked car).  If the borrower just drives off to another State with the car (and stops making payments), the lender has little or no recourse, unless they can track down the car if it is re-registered in another State.  Even then, the cost of recovering the car and reselling it pretty much negates any recovery.

And bear in mind, that the borrowers in this category are inclined to do stupid things like this as their credit score attests.

Now, some might argue that we need to educate these consumers so they don't take bad bargains like this.  Or we need to work with them and police their behavior so they don't do dumb things like default on loans and whatnot.   I suppose that could work, but it would be expensive, and would it even be the province of government to act as a nanny in commercial transactions?   And who would bear the cost?

Well, the answer is, the lenders do, and one way they "nanny" their borrowers is to use technology like this.   The alternative to this "intrusive" technology is to not have anyone willing to lend to this class of borrower at any interest rate at all - or if they did lend, at even more usurious interest rates.

Of course, the borrower does have choices, whether they believe it or not.   People don't just "end up" in situations like this by accident.  It takes some work to end up with a 450 credit score and no money.  Drugs are usually involved, or alcohol.  Low self-esteem or just plain laziness or stupidity comes into play as well.

For example, take Darleen, a friend of mine from about 30 years ago.  When she graduated from high school, her Dad bought her an expensive but serviceable econo-box car.   When she graduated from college, she moved to the big city.  She had an apartment in Georgetown and a job that paid all her bills.   Rather than take care of the car, however, she just drove it until it ran out of gas (on numerous occasions) and never bothered to change the oil.

Within a few years, it was blowing black smoke and a number of things were wrong with it (bad brakes, bald tires, and so forth).   The engine seized in front of car dealer.  She went in and bought a brand-new car, of course.  She was given a token $500 for her "trade-in" which could have lasted a number of years with proper care.   Not being very smart or sophisticated, she paid far too much for the new car, and signed loan papers on onerous terms (as it was basically a nothing-down deal and her credit rating was poor due to delinquent credit card debt).

She repeated the process yet again.   Most of her disposable income went to partying - going out to bars and night clubs, hoping to meet "Mr. Right" in all the wrong places.  So the new car was neglected as well, and within a few years, it too, blew a gasket on the road.   She bought yet another new car, this time rolling over the negative equity into a new loan at an even higher interest rate.

And so on and so forth.   In her mid-20's and upside-down on a car loan - after destroying three brand-new cars in quick succession.   By the time I met her, she was already on car #3.

Being upside-down on a car loan isn't hard to do - probably half of America is in a similar situation.   Car dealer billboards loudly proclaim how they will "help you out" of a negative equity situation like this - with a new loan that is throwing gasoline on the fire.

You could blame the car dealers or the lenders, or you could blame Darleen.  What ever happened to Darleen?  She married a nice Arab man, who took her back to his home country and we never heard from her again.   No doubt, she is under a burka somewhere in the Middle East.  A very sad story.  But it illustrates the end result of a series of bad life choices and really nothing else.  There are shitty deals out there, from bad car loans to bad marriage proposals.   You don't have to accept either.

But getting back to sub-prime lending, the other "choice" people have is in not desiring consumer goods or saving up to buy them instead  The laptop thing is particularly troubling to me, as the last laptop I bought cost me $160 on eBay.   I have two of them, the first I bought brand-new at Wal-Mart quite a few years ago for $340.   A decent laptop isn't a very expensive item, and even on a limited budget, you can save up a few dollars a week and own one in a year - for far, far less than "renting to own" a brand-new fancy laptop.

And yes, I have had shallow people who paid $2500 for a MacBook laugh at my old Toshibas.   But hey, I have $2500 more in the bank than they do.   Status is an evil thing, and it causes a lot of people to make shitty life choices.

(And yes, I have borrowed money to buy a computer before - again when I was young and dumb, I borrowed $2500 to buy a Hyundai 286 computer, using a loan from the credit union.   $2500 was 10% of my pre-tax income at the time.  And no, I didn't need a new computer that badly, and before the loan was paid off, it was obsolete).

But again, you can understand why the "rent-to-own" computer store might want to track their laptop and shut it down if the consumer fails to make payments.   Computers are easily transported, stolen, fenced, and whatnot.   And the consumer demographic we are talking about here are folks likely to be clouding their minds with drugs and alcohol, if not just outright stupidity.

It doesn't take a rocket scientist to see that your typical meth-head could "rent-to-own" a laptop and make the first month's payment and then immediately sell or pawn the device for drug money and move on.  Bricking the device at least insures that the resale market for the laptop is zero.

We are told, however, that this is an outrage and an invasion of privacy.   And maybe it is, maybe it isn't.  Once thing is for sure, the rent-to-own laptop company will charge even more money than before, if they can't track and shut down the devices (again, that whole collateral deal).

So I am not sure this is a "victory for consumers" that these lenders are not able to control their collateral.   It just means even higher costs for consumers if they have to factor in higher loss rates for their loans - which is a mathematical certainty.

The real deal is, people have choices.  And it is very rare that folks end up in situations as described in the article entirely by accident.   There is often a choice - usually a series of choices - made along the way.  These kinds of shitty deals may seem like a "way out" for some people, but in fact, they are just a trap, causing them to fall further in.