Wednesday, May 1, 2013

After the Deal is Done, Will It Be Buyer's Remorse or a Happy Camper Who Exercised Informed Individual Free Choice? ... The Better Informed We Are, The Better Choices We'll Make

People make too many long term financial decisions without first thinking them through properly and thoroughly. While cynicism isn't necessary when deciding what to buy or borrow and how much to pay to do so, healthy skepticism is essential for buyers in a market based economy.

Sellers are primarily interested in looking after their own best interests . Buyers should be well informed as well. Then when an exchange occurs, both seller and buyer benefit and are satisfied with the results.

That's what Adam Smith long ago referred to as the invisible hand of the market. But he took for granted that each party to the transaction would take the time and make the effort to first be adequately informed in order to make an appropriate self interested decision.

To repeat, when a willing seller and a willing buyer arrive at an acceptable price for a free market based exchange of goods and services, each receives what he considers to be a good value for money. Otherwise there would be no deal struck and no sale would occur.

At least that's the basic idea. But to repeat, if willing buyers aren't informed buyers, they'll often have 'buyer's remorse' down the road.

Loans Borrowed Against Pensions Squeeze Retirees tells an all too familiar story about uninformed buyers getting ripped off by unscrupulous lenders:

"To retirees, the offers can sound like the answer to every money worry: convert tomorrow’s pension checks into today’s hard cash.

But these offers, known as pension advances, are having devastating financial consequences for a growing number of older Americans, threatening their retirement savings and plunging them further into debt. The advances, federal and state authorities say, are not advances at all, but carefully disguised loans that require borrowers to sign over all or part of their monthly pension checks. They carry interest rates that are often many times higher than those on credit cards.

In lean economic times, people with public pensions — military veterans, teachers, firefighters, police officers and others — are being courted particularly aggressively by pension-advance companies, which operate largely outside of state and federal banking regulations . . . .

The pitches come mostly via the Web or ads in local circulars.
“Convert your pension into CASH,” LumpSum Pension Advance, of Irvine, Calif., says on its Web site. “Banks are hiding,” says Pension Funding L.L.C., of Huntington Beach, Calif., on its Web site, signaling the paucity of credit. “But you do have your pension benefits.”
Another ad on that Web site is directed at military veterans: “You’ve put your life on the line for Americans to protect our way of life. You deserve to do something important for yourself.”
A review . . . of more than two dozen contracts for pension-based loans found that after factoring in various fees, the effective interest rates ranged from 27 percent to 106 percent — information not disclosed in the ads or in the contracts themselves. Furthermore, to qualify for one of the loans, borrowers are sometimes required to take out a life insurance policy that names the lender as the sole beneficiary. . . . 
The allure of borrowing against pensions underscores an abrupt reversal in the financial fortunes of many retirees in recent years, as well as the efforts by a number of financial firms, including payday lenders and debt collectors, to market directly to them.       
The pension-advance firms geared up before the financial crisis to woo a vast and wealthy generation of Americans heading for retirement. Before the housing bust and recession forced many people to defer retirement and to run up debt, lenders marketed the pension-based loan largely to military members as a risk-free option for older Americans looking to take a dream vacation or even buy a yacht. “Splurge,” one advertisement in 2004 suggested.
Now, pension-advance firms are repositioning themselves to appeal to people in and out of the military who need cash to cover basic living expenses, according to interviews with borrowers, lawyers, regulators and advocates for the elderly. . . . 
The oldest members of the baby boom generation became eligible for Social Security during the recent housing bust and recession, and many nearing retirement age watched their investments plummet in value. Some are now sliding deep into debt to make ends meet.       

The pitches for pension loans emphasize how difficult it can be for retirees with scant savings and checkered credit histories to borrow money, especially because banks typically do not count pension income when considering loan applications. . . . 

The combined debt of Americans from the ages of 65 to 74 is rising faster than that of any other age group, according to data from the Federal Reserve. For households led by people 65 and older, median debt levels have surged more than 50 percent, rising from $12,000 in 2000 to $26,000 in 2011, according to the latest data available from the Census Bureau.
While American adults of all ages ran up debt in good times, older Americans today are shouldering unusually heavy burdens. According to a 2012 study by Demos, a liberal-leaning public policy organization, households headed by people 50 and older have an average balance of more than $8,000 on their credit cards. . . . 
Financial products like pension advances, which promise quick cash, appear especially enticing because their long-term costs are largely hidden from the borrowers. . . .       

Borrowing against pensions can help some retirees, elder-care lawyers say. But, like payday loans, which are commonly aimed at lower-income borrowers, pension loans can turn ruinous for people who are already financially vulnerable, because of the loans’ high costs.
Some of the concern on abuse focuses on service members. . . .
Lawyers for retirees have challenged the pension-advance firms in courts across the United States, claiming that they illegally seize military members’ pensions and violate state limits on interest rates.
To circumvent state usury laws that cap loan rates, some pension advance firms insist their products are advances, not loans, according to the firms’ Web sites and federal and state lawsuits. On its Web site, Pension Funding asks, “Is this a loan against my pension?” The answer, it says, is no. “It is an advance, not a loan,” the site says."
Summing Up

Most lenders are legitimate operations, but some aren't.

That said, all parties to free market based transactions are primarily concerned with satisfying their own self interests, as they should be.

And in this regard, many people are well informed when making borrowing and purchasing decisions. Sadly, some people aren't.

Doing the right thing for yourself financially (and otherwise too) requires being both well informed and highly skeptical of the multitude of  "good deals" out there.

Taking the necessary time up front to be properly prepared by becoming well informed is always in the best interest of buyers.

Waiting until after-the-fact to look into the details of the agreement is simply too late.

Thanks. Bob.

No comments:

Post a Comment