Capitalism Run Amuck?
Last week I met a woman who needed help paying her rent. After some digging we determined that the cause of her financial crisis was the used car she had just recently purchased. She used her tax rebate as a down payment on a car that www.kbb.com appraised at about $8200. She paid $10500 for the vehicle, which meant after her down payment she had to finance between 8k and 9k. She financed the rest at 24% interest with the car dealer, meaning she owes 48 payments of about $275 a month on a car that is already 5 years old. Over the life of the loan, she'll pay $13,300 for a car that is now worth about 8k.
Adding in her cost of insurance and gas, she needs about $500 per month just for transportation. She makes $8 an hour (about $16k per year) which means even if she manages to get 40 hours a week (unlikely, given that employers don't usually allow hourly workers to work full time) then her monthly income is $1333.33. It quickly follows that she is spending 38% of her budget on transportation. After she pays her apartment rent of $490, she has $343 for utilities, food, medical (of course she doesn't have any insurance), dental, and any other expenses that might come up. In reality, she probably will only be scheduled to work about 30 hours a week, so her income is really 25% less than the figures here.
She made several bad decisions here. She shouldn't have over paid for the car. She shouldn't have financed the loan through her car dealer. She shouldn't have been buying that expensive of a car to begin with - she should have paid cash for more basic transportation with the money she used as a down payment. Hopefully she has learned some important and expensive life lessons.
But there's another side to the story here. The car dealer intentionally ripped her off. He overcharged for the car and then stuck it to her in the financing. A 24% car loan should be illegal. Period. That's just ridiculous.
I understand that free markets are important to create incentives for entrepreneurs, who create wealth which then trickles down to the commoners. But there ought to be some sort of checks and balances in the system. Our government recognizes that need and regulates many industries. Unfortunately it just has not yet stepped into the small loan industry. Hopefully this will come soon. People who are stuck in poverty will never improve their life circumstances with people like this car dealer and payday loan operators who are looking to take advantage of them.
Here's a good post from Larry James about the high costs of payday loans.
Adding in her cost of insurance and gas, she needs about $500 per month just for transportation. She makes $8 an hour (about $16k per year) which means even if she manages to get 40 hours a week (unlikely, given that employers don't usually allow hourly workers to work full time) then her monthly income is $1333.33. It quickly follows that she is spending 38% of her budget on transportation. After she pays her apartment rent of $490, she has $343 for utilities, food, medical (of course she doesn't have any insurance), dental, and any other expenses that might come up. In reality, she probably will only be scheduled to work about 30 hours a week, so her income is really 25% less than the figures here.
She made several bad decisions here. She shouldn't have over paid for the car. She shouldn't have financed the loan through her car dealer. She shouldn't have been buying that expensive of a car to begin with - she should have paid cash for more basic transportation with the money she used as a down payment. Hopefully she has learned some important and expensive life lessons.
But there's another side to the story here. The car dealer intentionally ripped her off. He overcharged for the car and then stuck it to her in the financing. A 24% car loan should be illegal. Period. That's just ridiculous.
I understand that free markets are important to create incentives for entrepreneurs, who create wealth which then trickles down to the commoners. But there ought to be some sort of checks and balances in the system. Our government recognizes that need and regulates many industries. Unfortunately it just has not yet stepped into the small loan industry. Hopefully this will come soon. People who are stuck in poverty will never improve their life circumstances with people like this car dealer and payday loan operators who are looking to take advantage of them.
Here's a good post from Larry James about the high costs of payday loans.
Labels: capitalism, politics, poverty, social justice
posted by Eric Livingston at
6/03/2008
1 Comments:
I am glad you have recognized and given validity to her mistakes. All too often the blame is put solely on the bankers, lenders, or in this case, dealers.
The mortgage crisis is a perfect example. The lenders and creditors were extending shady loans to people who could not afford the loan. Yet at the same time, most of the mortgage crisis is the fault of the purchasers. They are built up to believe they need or can afford more home than what is realistic. They sign the papers without ever reading a single word of the contract or asking the appropriate questions that will help them avoid financial distress. The same applies to cars, school loans, cell phones, cable service, and on and on and on.
What irks me is that because of the irresponsible behavior of the borrowers for not doing their due diligence, they feel the government owes them a buy-out.
Sorry... I have made so many financially stupid decisions in my life that have added up to a HEAP of debt... drowning, suffocating debt. But that is my fault. I was the stupid one for not asking the right questions and reading the contracts that I sign. I learned from it, educated myself, and moved toward financial responsibility.
Instead of buyouts and regulations, what I would like to see from our government are free education programs designed to help people not fall into these sorts of financial traps. If that were to happen, many of these shady dealers would simply go away because there would be no clientele for them to prey on.
Post a Comment
Subscribe to Post Comments [Atom]
<< Home