Household borrowing through credit cards, car loans, student loans and other installment debt—which excludes mortgages—rose at a seasonally adjusted 9.3% annual rate in December, following a 9.9% rise in November, the Fed said Tuesday. That was the biggest two-month surge since late 2001, when auto makers rolled out zero-percent financing after the Sept. 11 terrorist attacks.

The title of the article is Auto and Student Loans Drive Borrowing Surge.

Mr. [Troy] Davig said the latest data offer a glimmer of hope that the long process of household debt-reduction, called deleveraging, is in a late stage. That process has slowed the recovery as Americans worked to pay down debts rather than spend money on goods and services. “That’s starting to come to an end,” he said.

To be sure, household debt-reduction isn’t over. The McKinsey Global Institute reported last month that American households have wiped out $584 billion in debt since the end of 2008, mainly through defaults, but also through payments. Still, some $254 billion worth of mortgages is headed toward foreclosure, and household deleveraging likely won’t be complete until mid-2013, the report states.

Consumer spending makes up roughly 70% of our nation’s GDP. So, promoting frugality is a no-no. Paying down debt is frowned upon. Long-term, this is not a good thing.

Related: The History of the GDP and Consumer Spending

The Statue of Liberty - best tax preparation mascot ever?

Every day on the way home, we pass the Liberty Tax Statue of Liberty waving at us. I never have quite figured out why the Statue of Liberty wants me to do my taxes, but I get the idea that they want me to come in and find out.

The last time we passed them, though, I saw this sign:

REFUND ANTICIPATION LOANS

This sounds like bad idea on so many levels. I tried very hard to think of a situation in which this could be considered a good idea.  I even called our local Liberty Tax branch to get some details about the offer.

In order to represent them fairly, I want to make it clear that I do not think this is an evil company, nor do I think they are in any way running a scam or anything improper. But I do believe that they wouldn’t loan money to people if they weren’t making a profit from it, and I definitely do not think this is in the best interest of their customers.

When I spoke with the representative at Liberty Tax, I asked her what the terms of the loan are. She informed me that they don’t directly offer the loan or qualify people for it – it’s done through Republic Bank & Trust.  That means the terms will vary depending on the specific circumstances of the customer. I have to believe that people who are trying to qualify for this type of loan don’t have the best credit scores, so I’m sure the interest rates are high. (Based on some of the research I’ve done, it’s possible to see rates up to 500%!) Every person who qualifies can receive a loan of up to $1,500, and the amount is paid back when their tax return refund comes in.

The only positive note I could find in the whole thing is that you can’t qualify until after your taxes are calculated.  At least theoretically, the customer would know how much their refund will be before they decide whether to apply for a loan.

I specifically asked the representative if they recommended these types of loans. She didn’t really answer that question, but simply said she would do what the customer wanted.

Debt is bad. Debt based on the anticipation of having a lot of money come in “soon” is really bad. It’s so tempting, though, to take the easy way out.

Here’s two reasons this is a bad idea:

You’re choosing to have a small amount of money right now instead of a larger amount of money later.

We’re a society that wants instant gratification. We don’t want to wait for anything. Some of it is because we’re greedy: We want our money – and the stuff we can buy with our money – RIGHT NOW. Some of it is because we’re scared: Maybe we are afraid there’s a bill we can’t pay, and this seems like the best – or easiest – way to pay it. But if you wait, you can do more with your money later than you’ll be able to do with it right now.  In order to receive this type of loan, here are some examples of the fees and charges you’ll be expected to pay (rough numbers):

Tax preparation fee: Around $200 (according to About.com)

eFiling fee: Usually around $25 (according to TuboTax)

Loan origination fee: Usually around $32 (according to Wikipedia)

Interest (assuming a rate of 20%): $50 (20% is a very generous estimate according to CRL)

So you’re spending $307 to receive your money a couple of weeks early. Is it worth it?

Let me say that again: it’s YOUR MONEY, but you’re paying someone else to give it to you. That does not make sense on any level.

When you go into debt, though, you are giving away control of your finances and part of your life.

When you borrow the money initially, it is subject to someone else’s terms – they decide how much money they will give you, when they will give it to you, how much interest you have to pay back. When your refund finally does come in, it’s not yours to do with what you want. You have to give it back to the people you borrowed it from in the first place. Even the Bible tells us, “The borrower is slave to the lender.”

Here’s an important “grown up financial lesson” to learn: Even when it feels harder in some ways, being in control of your own life and finances brings more freedom and security than handing it over to someone else.

So what would you say to someone who was considering getting one of these loans? Is there anything you could say that would change the mind of someone who had already decided to get one of these loans?

Debt Collectors Ask to Be Paid a Little Respect

Morari Shah, a 59-year-old Miami entrepreneur and real-estate investor, is among those taking a radical approach to reducing debts.

Since late 2008, he and his wife have slashed their total debt from nearly $1 million to zero by walking away from the mortgages on four rental properties and paying off two others, all of which lost about half their value in the housing bust. He’s no longer taking up to $4,000 from his monthly income to pay mortgage interest that the rental income didn’t cover.

Instead, he and his wife are fulfilling their goal of building a new $350,000, four-bedroom home in the Dallas suburb of Lewisville, where they plan to retire. “It’s a big relief,” said Mr. Shah. “We went through some rough times, but now I’m comfortable and don’t have to worry about my retirement.”

That’s so nice. I’m so happy for Mr. Shah.

Seriously, Mr. Shah is (or was) an entrepreneur and real-estate investor. It doesn’t seem like he would have been taken advantage of by unscrupulous banks and mortgage brokers.

That’s why I’m not a fan of this walking away business. If things were so bad that he couldn’t afford his properties, then he should have had to file for bankruptcy and lost everything and had to start over. He shouldn’t have been allowed to simply walk away and then move to Texas to build a brand new $350,000 house.

I know some of you will disagree but this stuff drives me nuts.

Beauty matters in life and loans alike. Beautiful applicants are more likely to get loans and pay lower interest rates than less attractive applicants with the same financial information. Moreover, loans to beautiful loan applicants are bad investments because beautiful borrowers are much less likely to repay their loans than less attractive borrowers. Lenders to beautiful borrowers give up the utilitarian benefits of high interest rates and high likelihoods of being paid because they are fooled by the positive sentiment exuded by beautiful applicants. Or perhaps they are not fooled at all. Perhaps they willingly give up the utilitarian benefits of high interest rates and steady loan repayments for the expressive and emotional benefits of associating themselves with beautiful people.

The author references this paper, which you can download (I have not read the paper).

I thought the paragraph was interesting. Perhaps beautiful people get the benefit of the doubt because they appear to take care of themselves. It’s really no different that the advice we normally hear about dressing your best for a job interview. Employers typically don’t want to hire an “ugly” person even if their credentials are outstanding. Maybe this same thought process carries over into other parts of life. Maybe less-attractive people would do better to do business with QuickenLoan.com where face-to-face contact is not necessary.

1. Get Prepared: The More You Know, the Better – Develop a budget so that you know what you can afford to pay back. Familiarize yourself with the Fair Debt Collection Practices Act (PDF). Understand your loan terms. Get all your bills organized and take good notes.

2. Be on Guard When Dealing with Creditors – Credit companies have one goal: to get your money.

3. Remember That No Two Creditors Are the Same – What works for one creditor won’t work for another.

4. Communicate – This is no time to stick your head in the sand. Don’t avoid the calls.

5. Make Collectors Stop Calling and Writing – The book has sample letters that can be used to get creditors to stop calling. If they don’t, you can contact your state’s attorney general and report them.

6. Make Offers to Your Creditors – Make a reasonable offer to your creditors and see if they accept. If they think you are serious, they will be more willing to work with you.

7. Remain in Control – Remember that you have something that your creditors want: your money. This puts you in control.

8. Be Patient and Persistent – Be patient. If you get nowhere, call back and speak to someone else. If that doesn’t work, talk to a supervisor. Be patient.

9. Have No Fear – Don’t let creditors scare you. I’m sure that some of them will say some pretty scary things. Remember you’re in charge.

10. Threaten to File for Bankruptcy – Creditors hate the idea of you filing for bankruptcy. The authors recommend saying the following to a supervisor: “Without a sharp reduction in my rate so I can afford to pay, I will have to consider bankruptcy.”

11. Call Once, Then Use Certified Mail – After an initial call, it’s best to use certified mail. Certified mail gives you signatures and receipts for your records.

12. Get It in Writing – If a creditor offers you something, get it in writing before you pay anything. Without it being in writing, creditors may “forget.”

13. Only Agree to Terms You Can Afford – Why would you do anything else?

14. Never Agree to Pay a Debt You Don’t Owe – Makes sense to me.

15. Use Time to Your Advantage – The longer you stretch out negotiation, the better it is for you. Debts expire after the they reach the statute of limitations. Creditors are aware of this and are more willing to negotiate the closer you get to the statute of limitations.

16. Uncover your Creditor’s Bottom Line – Chances are good that your debt was sold to a debt collection company. The authors say that debt collectors pay $.02 to $.08 for each dollar of debt. That means if you had a $1,000 debt, the debt collector paid $20 to $80. Understanding this gives you power to negotiate. The authors say that debt collectors might be willing to settle for 50% to 70% of the original debt.

17. Don’t Let Legal Jargon Trip You Up – If the creditors use terms you don’t understand, ask them to explain. Do not let the jargon scare you. Remember, take notes. Use Google and research what you don’t understand.

18. Be Honest in Your Dealings – Don’t lie. You lose credibility if you lie.

19. Never Assume Another Person’s Debt – Make sense to me.

20. Use Honey, Not Vinegar – Be nice.

Most of the twenty keys are addressed in depth in the book, which is around 350 pages. This book (from what I can tell as I have not yet had time to read it in its entirety) treats the subject of getting out of debt in great detail.

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Shirley Davis, a 66-year-old retired phone-company administrator who lives in Brooklyn, N.Y., is more than $33,000 in debt, earns just $2,414 a month and filed for bankruptcy in June. Shortly before that, she ripped open an envelope from Capital One Financial Corp., which pitched her a credit card even though it sued her in 2006 to recover $4,470 she owed on a different card from the bank.

“At some point we lost you as a customer and we’d like to have you back,” the letter said. Ms. Davis said she was stunned. “Even I wouldn’t give me a credit card at this point,” she said.

Source: Signs of Risky Lending Emerge in U.S.

A quote further into the article by someone in the banking field assures us that banks are being wise these days. Yeah right.

I nearly laughed out loud when I read this:

Experian recently began working with large banks it won’t identify to analyze borrowers who stopped paying their mortgages when home prices tumbled. The goal is to determine which borrowers are most likely to keep paying their other bills, and should be offered more credit.

I can’t believe what I’m reading.

So what are your thoughts? Do you think banks and other lenders learned their lesson or do you think the bailouts gave them free license to whatever they want because now they know that they’ll be bailed out again when things go bad? I’m pessimistic about this.

EZ’s response was quite good:

Good Morning Sir,

I just read your Op-Ed piece in the online NY Times. I disagree with your premise as summarized by your last paragraph.

“Such a bold reshaping of the bankruptcy system would provide Americans immediate respite from crushing debt and the ceaseless emotional and financial pressure that comes with it. Then they could turn their attention to finding new jobs, moving into housing they can afford and caring for their families.”

I believe making it easier to declare bankruptcy would only put more pressure on citizens who are responsible, pay their debts and taxes, and positively contribute to our economy and country. My wife has been in the mortgage business for nearly 30 years and she thinks your idea is wrong headed. She has experienced people, well before the meltdown, who had declared bankruptcy and waited 2 years to purchase another house. Inevitably, when she told them they were purchasing too much home for their income, they would respond by saying that if they couldn’t make the payments, they would declare bankruptcy again. A lot of folks have lost jobs or are experiencing reduced wages through no fault of their own but many more people who used their homes as a bank to pay for vacations and new cars or who bought homes they really couldn’t afford are in trouble by their own volition and irresponsibility. If we make it simple to declare bankruptcy, these people will use it as a financial turnstile to once again live beyond their means at our expense.

Take a look at the US savings rate over the last 10 years. So many were living paycheck to paycheck, not planning for a financial misstep. Also look at the lifestyles of these same people. New cars, houses they could not afford and vacationing like there was no tomorrow. Too much credit, not enough responsibility. And yes, there are others that share the blame. Congress, banks, regulators, credit ratings companies and overpaid CEO’s. But at the end of the day, it was the consumer who purchased homes, cars and vacations they never could afford.

Why do you think people should not honor their debts and commitments? Who made them buy the house they could not afford? By the way, just because a homeowner is underwater on their mortgage doesn’t mean they cannot afford to keep paying for their home. It just means they cannot use the home as a bank anymore.

I truly do not mind helping people who are in need. But I do mind when someone tries to make me help someone who lived irresponsibly and is now looking for a handout(that includes corporations). Making it easier to declare bankruptcy punishes those of us who lived frugally and responsibly. In this area, I believe my wife has much more experience than you do. So many times she told borrowers they were trying to get a mortgage they could barely afford. Most times she was told that they did not care and if my wife would not do the loan, they would find someone who would. My wife lost a lot of business that way.

First sentence of the second section of the Declaration of Independence: “ We hold these Truths to be self-evident, that all Men are created equal, that they are endowed by their Creator with certain unalienable Rights, that among these are Life, Liberty and the pursuit of Happiness.” It only guarantees the Pursuit of Happiness, not happiness itself.

Have a Great Day!

EZ

Although it seems hard to believe, there was a time when consumer debt was virtually non-exsistent. According to Geisst, consumer debt really took off after World War II:

“After surviving as a prohibition for years, the charging of interest underwent a profound change after World War II. A dramatic increase in population provided for easier credit for the masses, especially in the United States, and a relaxed attitude toward indebtedness in general. A subtle shift occurred. What previously had been known as the more onerous term “debt” now took on a positive note. Those in debt were referred to as having “recieved” credit. The newer version of the old concept made it more palatable to be in debt because now the borrower was being extended credit, as if being given a gift. Personal and corporate indebtedness grew to levels never anticipated fifty years before.”

There’s no doubt that “credit” has a lot more positive ring to it than “debt” does. People began taking out longer-term mortgages and financing big ticket items like cars and appliances. Once people started getting into debt, it was hard to get out.

Anyway, I thought it was interesting how the public’s perception of something can change dramatically in just a few years.

Thoughts?

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