If borrowing is the answer


II did a piece about people in debt a while ago.


One of the things that caused the physical problems I mentioned is that people have chronic debt.


That’s, chronic, not in the sense of bad, but of ongoing, of constantly having too much month at the end of the money.


Which brings me to a BBC programme about pawnbroking.


The use of pawnbrokers is on the rise, apparently, even among people who can afford to pawn items such as a watch valued at over £30,000.


I’m not sure that makes a lot of sense in the real world.


It is cheaper, we’re told, than alternatives.  The figures given were that for a month’s loan of £100, the redemption charges would be:


Pawnbroker £108

Pay day loan £142

Unauthorised bank overdraft £200


By my calculations, that means that the relative APR’s are:


Pawnbroker 151.82%

Pay day loan 6,621.41%

Unauthorised bank overdraft 409,500%


Now there’s no doubt that the pawnbroker is cheapest.


But is more than 151% APR a good rate?  It makes credit cards at 25% or so look cheap (and they certainly aren’t). 


What is wrong with an authorised overdraft, or even a credit card?


Presumably in those situations, the person involved can’t get credit.  But if we’re talking about people who can pawn things of high value, why are they borrowing at 151% or more on a short term basis?  Either their long term financial situation is dire, and a short term loan at extortionate rates will push them further behind, or they genuinely only need a short term top up until things turn out fine again, in which case how did they so mishandle their finances that they have no cash to buy food but have a £30,000 watch?


I think the answer is that people adapt very fast on the way up, slowly on the way down.  Like Gerald the “company Director” (played by Tom Wilkinson) in the film, The Full Monte, plenty of people feel they can’t allow the facade to slip.


When we face reverses, loss of job, portfolio wrecked, cash crisis, credit card bills, children who want more material goods, human beings try to pretend it hasn’t happened.


We continue to live on credit, even when we know that we’re paying a very high price for not being realistic.


We could say, “things have turned against me, I need to face reality, to stop playing the market, replacing the car every year, having the glamorous holidays, paying the green fees for the exclusive course”.


In other words, to be realistic and to accept that happiness in life doesn’t depend on material goods our grandparents never thought of.


But do we do that?


Is it really a good idea to encourage banks to lend at “competitive” rates, and to authorise ever higher overdraft limits for people who, on the evidence, are a poor risk for repayment, and who thus should be charged a high rate for high risk, in accordance with the tenets of prudent banking practice?  Didn’t bundling of junk loans and triple A securities contribute to the crash? 


So why do we, as a nation, want to do it again?


And why would you do it to yourself?



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