Tuesday, July 4, 2017

Are Payday Loan Users Victims?

In a recent post about payday loans, reader Paul had the following (lightly edited) comment:

“You know I used to feel sorry for people who get caught up in this money cycle. But when most people would rather just watch Dancing with the Stars or an insane reality program and not spend 30 seconds on improving any aspect of their financial lives, I just can’t.

“One’s financial problems seem to always be ‘someone else’s or some fat cat banker’s fault.’ No one is responsible for themselves anymore. For the poor who struggle to make ends meet and this is the only option, yes I agree that is bad; for the rest, you get what you deserve if you can't pay for that non-essential ‘toy’ or latest iPhone you purchased you just had to have.”

There definitely are many people who deserve Paul’s criticism. But many who get caught up in a vicious payday loan cycle had plenty of help getting there. When I’m asked to referee a dispute, I like to say that we shouldn’t overlook the possibility that everyone is wrong.

Before looking at the causes of debt troubles, it’s important to recognize that on a pragmatic level, it doesn’t matter whose fault it is that you’re stuck in debt. If nobody else will help you, then you have to help yourself. So, don’t take any part of the rest of this post as an excuse to throw up your hands and declare your debt troubles to be someone else’s fault; that won’t help you.

Most of us start off young and clueless about money. It’s easy to begin a descent into debt trouble without realizing the path you’re on. These people aren’t blaming others for their problems because they don’t know they’re in trouble yet. As they begin to recognize the signs of trouble, they react in different ways. Some take positive actions to climb out of their financial hole and some blame others, but many just bury their heads in the sand for as long as possible pretending nothing is wrong.

The financial industry has great skill when it comes to promoting debt and helping people maintain their lifestyles while building debt. When your debt is split across multiple credit cards, lines of credit, car loans, and a re-advanceable mortgage, it’s very easy to lose track of whether your debt is rising from one month to the next.

If tobacco companies were to hire attractive 21-year olds to give free cigarettes to kids on their 18th birthdays, parents would riot. We react much less to banks hiring attractive people to push credit card applications on young adults. However, for many debtors, getting into a vicious payday loan cycle is the end of a descent that began with mishandling a first credit card.

Student loans are no help in teaching people to avoid debt. Tuitions have risen so high that it’s very difficult to get an education without a loan. Starting your adult life owing $20,000 normalizes being in debt. How could it hurt to add another $1000 on a credit card? At this point, the debt cycle is well established.

Any time I’m inclined to judge debtors harshly, I wonder what effect today’s debt-pushing machine would have had on me. I was turned down for student loans because I went to school in a different province, and fortunately for me, being in debt didn't seem like a normal state when I was young. If I were growing up today, I probably would be able to get student loans. Without the strong push I got toward frugality, perhaps I might have got an early taste for a more expensive lifestyle.

When it comes to Canadians’ debt problems, there’s a lot of blame to go around. But we can’t wait for banks, universities, and government to grow a heart and stop contributing to the debt cycle. The only person you can count on to get you out of a debt spiral is you.

4 comments:

  1. I agree with you, especially after reading 'Nudge' and 'Pre-Suasion'. Pretty sure I questioned all of my decisions for quite a while after reading those books.

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    1. @aB: Those are two good books. It's humbling to realize that you've been manipulated.

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  2. The financial industry is offering a product. The product is a valuable service. Some people misuse it. Also within the product range there are poor offerings. Same goes for cars, healthcare, you name it.

    Ultimately it is the responsibility of an individual to manage his financial affairs responsibly. Banks can use whoever they want to advertise their products. The one and only case when the user of loans is not at fault is when he was lied to.

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    1. @BHCh: You're simply quoting the law. It's practical for individuals to see the world this way and do what they can to defend themselves. However, it makes sense for lawmakers to examine cases where people are harmed, and it's clear that many people are harmed by the financial industry.

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