How much should society control bad financial behavior?

[disneysteve]

my problem with restricting "bad" financial behavior is where do you draw the line? there are somethings that are obvious things like giving a 500K mortgage to a person making 30K. but how much credit card debt is "too much"? a couple of years ago, I had about 5 times my gross income in credit card debt all at 0% with an equal amount sitting in saving acounts/CDs. if someone racked up 5 times their gross income in credit card debt by spending it on tvs, toys, cloths, eating out,.. they would never be able to escape. so how would you differentiate that I was ok and the second person is in deep trouble?

Good question. You do that by going back to the lending practices of the past. Rather than just looking at your FICO score and annual income, lenders should be required to collect more data before lending money. Potential borrowers should have to show evidence that they have the means to repay the money they are looking to borrow. There could be a standard worksheet that details not only your income but also your expenses. Sure, someone earning 100K might be able to afford a 300K mortgage, but not if they also have 2 car loans, 25K in CC debt, a kid about to start college and next to nothing in savings. Lenders should have to start looking at the big picture.

[disneysteve]

Have you ever taken out a mortgage and read and fully understood the hundreds of pages that you're signing?

Nope. Not at all. That's why my attorney reviewed all the paperwork and came to closing with us, but not everyone can afford that option and it shouldn't be necessary.

We're all investors here. Honestly, how many of you have actually read the whole prospectus for each fund that you invest in. And if you did, did you totally understand everything that you read?

[Investing First Steps]

It's always a slippery slope to get involved in the behavior (financial or otherwise) of your populace. Once you invest time and energy into trying to 'help someone' you now have an investment in them that you need to protect the same as when you invest money. So now you have further rights and needs to control their behavior to make sure your initial investment is protected.

That being said, all of us want to operate in a market where we don't have to do a tremendous amount of research before we make any action. You want to be protected from fraud and deception as much as possible in your daily life so you don't have to waste a tremendous amount of time vetting every investment, purchase etc. you make. Like all things, it is a balance.

FDIC insurance is a good example. While you could just say "it's the investor's responsibility to research their bank," by making that insurance available we make it much easier to trust institutions. Imagine how many man hours would be wasted and how much less would be saved if you had to get out a bank's 10-k before you were willing to buy a CD from them.

[buzz]

No. It’s your responsibility to become informed and not make stupid financial decisions. I don’t think it should be the government’s job to protect the stupid.

You sound as though you believe that your intelligence is something you achieved.

[cptacek]

a lot of adults don't understand basic math concepts. like ask the average adult, "if you invest $100 at 10% interest for two years, how much will you have?" most will say $120, not 121. or "if a item is $10 and it is on sale for 30% and then it is marked down an additional 20%, what percentage off is the item" most will say 50% off(20+30) not 44% (1-(1-.2)*(1-.3)).

I think this is the worst problem. People don't know math. I mean, how many people have come on this forum asking for some kind of calculator when what they really need to do is figure out an amortization spreadsheet for themselves. Like that long thread we had a while ago where they were doing the "Australian mortgage" or some thing, and we proved that it wouldn't work and people "believed" it would anyway.

I also think people aren't curious and are too trusting. They think everyone else is looking out for them and that they won't try to undermine them when money is involved.

By the way, both mortgages I signed I read every page. They had to wait for me to finish reading it before I would sign each page, even if I had read it before. I didn't want something to be snuck in there that I hadn't seen before.

[simpletron]

You do that by going back to the lending practices of the past. Rather than just looking at your FICO score and annual income, lenders should be required to collect more data before lending money. Potential borrowers should have to show evidence that they have the means to repay the money they are looking to borrow. There could be a standard worksheet that details not only your income but also your expenses. Sure, someone earning 100K might be able to afford a 300K mortgage, but not if they also have 2 car loans, 25K in CC debt, a kid about to start college and next to nothing in savings. Lenders should have to start looking at the big picture.

while I will agree that lending practices have gotten way too lose recently and they need to be tighten( and will be). but I don't like the idea of a hard line that you can't pass.

take your supposed family making 100K, what is the maximum mortgage they can afford? and why it is that number and not that number plus one dollar because dollar more will only cost them less than a penny a month more. I'm sure one penny won't break their budget. or a thousand dollars more which equals a giving up one starbucks coffee per month, or ten thousand dollars more which which equals giving up one or two dining out night. small changes in lifestyles can equalate to fairly large difference in how much a family can afford.

but if set the limit too high to start with, people will assume that you can spend up to that without questioning that limit. and that will lead their downfall financially.

so where is the perfect balance given the hundreds of variables in our lifes that affect finances? there is no right answer I can think of. but if you pick an answer you will hurt someone by either allowing them to spend too much or by not allow them to spend as they can afford.

and if you aren't going to draw the line in the sand, then you aren't restricting or eliminating "bad" financial behavior because guidelines can be bend and broken.

[disneysteve]

I don't like the idea of a hard line that you can't pass.

set the limit too high to start with, people will assume that you can spend up to that without questioning that limit. and that will lead their downfall financially.

Set an upper limit but require people to qualify for that limit. Not everyone will. Look at the car dealers. They advertise 0% financing for qualified buyers. Most buyers don't qualify and get offered financing at a higher rate.

Buying a home should be the same way. You need to be able to prove that you can afford the loan you are appying for. If you have no kids and no debt, you should be able to qualify for a larger loan than someone with the same income but 4 kids, student loans, car loans and credit card debt.

[Goldy1]

I have read articles on these payday loan places. It is a debacle as is these "rent to own" furniture and tv stores.

In a sense, I don't think we should regulate what other people do b/c where do we draw the line? Why should we restrict payday loans? Should we make sure people who book vacations are not aking them on credit or not allow people on public assistance to get their nails done? These are good points but.....

I do think we have to stick up for the uneducated/uninformed in our society. These paypay lenders should not be allowed to take advantage of people. Imagine a father needing an advance to buy an x mas present or to stay in his home? WE need to regulate what they can charge. I am lucky I have for now family to fall back IF it ever came to that, but we must be caring.

[maat55]

I think the limits should be set some degree below what you can afford. In other words, there should be a lending curve to find the medium ground between the very responsible and the idiots.

Society having to, across the board, use better judgement due to lack of available debt, is better for everyone as a whole.

I see two spectrums on finances: Negative (Borrowed paying interest) and Positive (invested earning interest). I chose to live by the positive as much as possible, society is geared towards the negative. Some, who live by the negative, cheat by consuming products then file BK.

Limiting debt and the use of BK levels the playing ground.

[Goldy1]

Good point about society as a whole not being informed. It does not mean people are not smart or that they even don't care, they just do not know. SOOOO many people get bored with an dhave NO interest in personal finance education let alone practicing restraint but that is another topic. Whenever I have started to explain to one of my girlfriends who pays mor ein mothly rent in a tiny apt. than I do for a nice size home the BASIC principles about home equity etc. she LITERALLY dozes and gazes off in the other direction and this is me "dumbing it down" and making it sound like a great thing. She does not know if her job has a 40K after being there almost 3 years.

[disneysteve]

Why should we restrict payday loans? Should we make sure people who book vacations are not aking them on credit

These paypay lenders should not be allowed to take advantage of people. WE need to regulate what they can charge.

I'm not suggesting we do away with payday lenders. I'm suggesting that we regulate the fees and interest they can charge. Perhaps 20% is reasonable. 300% is not.

As for making sure people booking vacations aren't doing so on credit, that problem would be taken care of when they apply for the credit. If they show evidence that they can afford the credit line being granted, how they use that credit is up to them. The problem arises when the CC company gives someone a credit limit way out of proportion to their income such that if the person were to actually charge up to the limit, they couldn't possibly afford to pay the bill.

We have a combined credit limit on our cards of somewhere in the 100K neighborhood. While it would not be a good thing for us to charge that much, if we did, we have the means to pay the bill in full (not just the monthly minimum payment). Lots of people, though, have credit limits that greatly exceed what they could afford to repay. That's what shouldn't be happening.

[jIM_Ohio]

interesting responses.

if you make something idiot proof, the world has always invented a bigger idiot.

in working for HR block they give the equivalent of payday loans, then have the audacity to say they are qualified to give low income people financial advice.

they want regulation of payday loans so their products, under a different name, become more popular.

let the poor or stupid or uninformed 5% (or 10%) go bankrupt because of bad behavior. MC Hammer went bankrupt on much more, so bankruptcy is something not limited to the poor, yet most of the rules being suggested are geared towards the poor.

As for the math, my wife has a BS and probably could not handle the math mentioned. Personal finance education is not the solution.

[srblanco7]

While regulation may seem appropriate to limit the potential for obscene predatory lending practices, I'm concerned that continued efforts to protect us from ourselves (and our poor decisions) lead only to additional government involvement in our lives. I think we can all agree that additional government isn't always the solution.

[bjl584]

I wouldn't have a problem if a payday loan establishment wanted to charge 5 Billion Percent interest. The problem that I have with them is that they are not up front about it. Most of their clients aren't exactly the most financially savy. If they were, they wouldn't be going to a place like that for a loan. They don't know anything about APR, APY, interest rates, etc. I think that the payday loan industry is well aware of their customers' ignorance of financial matters and takes advantage of that fact.

[Investing First Steps]

I think it's going to be hard to legislate that a business educate it's customers in why its product is not in the customer's best interest.