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avengerscion's avatar

Ability to repay credit: Consumer and Creditor responsibilities?

Asked by avengerscion (582points) February 4th, 2010

When consumers apply for credit (mortgages, vehicle loans, credit cards, etc.), creditors do not look extensively at the consumer’s finances. Instead, they use the consumer’s credit score, income, and major living expenses to determine eligibility and APR.

Realistically, creditors do not have the resources to extensively review every customer’s finances. Thus they use set income to debt percentage standards, etc. to make decisions. Because busnisses need to ‘make the sale’ while also ‘compensating for risk,’ consumers may receive credit they cannot afford in addition to higher interest rates. Some people assume that if they were approved for financing, they must be able to afford it. As a result, many consumers accrue debt beyond their means of repayment.

Should consumers and/or creditors do more to determine how much credit should be extended/accepted?

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8 Answers

Judi's avatar

I think it’s the consumers job to know what they can afford. It’s pretty simple math.

Pazza's avatar

Unfortunately almost the entire global ecconomic system is fiat based, thus almost all of money in circulation is debt owed with interest to a central bank, similarly, almost all money in banks is the same. Therfore banks have no choice but to perpetualy create money into existance through credit to sustain the ecconomy.

If they don’t print money the system will collapse.

PandoraBoxx's avatar

Lenders used to be more circumspect. They do look at your outstanding available credit to income as a ratio.

It is a serious problem, especially when buying a house. Many lenders will calculate principal and interest, and buyers, especially first time buyers, will look at that and judge what they can afford based on that amount. The reality is, depending on the cost of the house and the tax rate in the community, the taxes and insurance on a house can add another $300 – $700 a month onto the payment. Not all banks escrow that for borrowers. Ads like offer $160,000 mortgage for $633 a month are misleading because that’s only prinicpal and interest. If you can’t afford a payment of $933 – $1333 a month, you can’t afford a $160,000 mortgage.

YARNLADY's avatar

Very few seeking credit are knowledgeable enough to make an informed choice. Most people have no understanding of interest rates and all they know of payments is what the lender tells them.

tinyfaery's avatar

It would be fine to say the consumer should know what they are signing, but the system is so difficult to navigate and understand that even those with a decent high school education cannot fully understand how it all works. Until every Joe Shmo understands the lending system we must rely on creditors to be honest and fair. So in other words, we’re all screwed.

Pazza's avatar

A quote:

“we are completely dependent on the commercial banks. Someone has to borrow every dollar we have in circulation, cash or credit. If the banks create ample synthetic money we are prosperous, if not, we starve. We are absolutely without a permanent money system. It is the most important subject intelligent persons can investigate and reflect upon. It is so important that our present civilization may collapse unless it becomes widely understood and the defects remedied very soon.”

Robert H. Hamphill, Atlanta Federal Reserve Bank

Taken from this book by:
Mary Elizabeth: Croft (Mary of the family Croft).

Should consumers and/or creditors do more to determine how much credit should be extended/accepted?

So I would have said that it is the consumers fault for not realizing how the system works, but on reflection, we are never taught how the system works, in actuality it would seem that we are actively lied to and pumped full to the brim with a false reality to perpetuate the illusion that it is the consumer ‘buying/not buying’-‘borrowing/not borrowing’ and conflict causing fluctuating oil prices which causes the ecconomic fluctuations, when the true reality is that it is simply the amount of available credit in circulation (interest rate) that causes ecconomic growth and recession.

When the interest rate goes up, people borrow less hense there is less fiat money in circulation and there is ecconomic retraction.

when the interest rate goes down, people borrow more hense there is more fiat money in circulation and there is ecconomic growth.

Dr_Lawrence's avatar

I believe consumers need to be much more careful in taking on large amounts of additional debt.

Lenders look after themselves and sometimes not even that.

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