Tuesday, December 18, 2012

Ever Wonder Why Your Banker's Laughing So Hard? Look At Your Interest Rate


If you want to get a real handle on what keeps the financial industry afloat in greenback gravy, while millions of people remain mired in economic misery, the following example should serve as an illustration, and also, a warning.

In this case, the source material comes from a financial management course that the U.S. Bankruptcy Court requires of its petitioners, passed on by someone who's undergone the process.  The reader is asked to ponder two hypothetical case studies, affected by different credit histories:

Kelly
Credit Score: 750
Interest Rate: 4.5%
Loan Amount: $175,000
Insurance: $500 annually
Property Taxes: $4,000 annually
Monthly Payment : $1,262
Total amount to be repaid: $319,211 

Lisa:
Credit Score :620
Interest Rate: 7.75%
Loan Amount: $175,000
Insurance: $500 annually
Property Taxes: $4,000 annually
Monthly Payment: $1,629
Total amount to be repaid: $451,341

Although Kelly's credit score will give her a hypothetically less bumpy ride in life, the reader should notice the repayment amounts, which are highlighted in bold, for your convenience. In Kelly's case, she's still going to pay back almost twice the loan, while poor Lisa will cough up slightly more than three times the original amount. Ever wonder why your banker's laughing so hard?


The impact of interest also plays a role in the debate about the impending student loan debt bubble, which -- amid all the ink being expended on the current Fiscal Cliff Debate -- has received precious little attention, but certainly should. Ever wonder why your banker's laughing so hard?

Last year, the Consumer Financial Protection Bureau (CFPB) put out a call for student loan horror stories on its website. This example, courtesy of Yahoo News, is an example of rapacious laissez-faire capitalism at its most harrowing:

Socialworkmary: Paid $350+ per month on her loans for 14 years to no avail

"I admit I did not understand capitalized interest until recently. I consolidated my loans in 1997 when the interest rate was 8 percent. My student loan office at Tulane University led me to believe that I 'had' to consolidate and Sallie Mae was the only option offered to me.

I have repaid them over $61,000 (over 14 years). I think I should be done now, but according to Sallie Mae I still owe $25,000. A Sallie Mae employee directed me to write the legal department and ask to have my loan written off and to appeal if they denied. They denied, stating that federal government regulation prevents them from writing off the balance of the loan.

When I talked to the Sallie Mae employee and said I was confused about why on most months more of my payment goes to interest than principal... she chuckled and said 'We certainly don't go out of our way to put that in big bright red letters across the front page'." 
You can read the original CFPB press release on the subject here:

http://www.consumerfinance.gov/pressreleases/consumer-financial-protection-bureau-aims-to-shed-light-on-the-private-student-loan-industry/

And, if you want to take a truly depressive bath during this most difficult of holidays for folks living on the margins, this "Business Insider" story should do the trick:
http://www.businessinsider.com/depressing-student-loan-stories-2012-9?op=1

Just cut, paste and then...shake your head.

Ever wonder why your banker's laughing so hard?  It's safe to say that 99 percent of us know all toll well, but sometimes, we need a healthy reminder (or two) of why the picture doesn't look so pretty for those of us caught in the grip of such schemes...and, also, why those who continue to champion the status quo need to be held accountable for promoting them.  --The Reckoner

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