Future shock

May 1, 2013 

In so many ways it is a formula for disaster for older Americans, in particular military veterans. The financial phenomenon, one might call it, is described as a “pension advance,” but an extensive New York Times report finds most such advances are really high-interest loans against pension income that are offered by companies that operate outside the arena of banks and other financial houses.

They can charge pretty much whatever interest they can get away with, and they do.

Consider the case of Ronald E. Govan of Georgia, a retired disabled military veteran who has a pension of just over $1,000 a month. Because of financial problems (foreclosure, bankruptcy), he couldn’t get credit or a credit card. He was solicited by a company offering a loan, quickly, to come against his pension. He signed on for $10,000. His monthly payment was $353, which over five years added up to $21,180. The interest rate? It was over 36 percent.

Some rates are even higher, The Times reported.

After all, in hard times even more people are in financial trouble, sometimes in desperate trouble, and willing to sign on any dotted line if they can get emergency cash. But in borrowing against pensions, they’re quite literally mortgaging their futures.

The money they borrow, after all, generally goes quickly, spent on everything from medical care to housing. And in many cases their nest eggs, such as they were, have already been diminished.

So that leaves them with less money saved, less coming in through pensions because of money borrowed that has to be paid back, and the same expenses. That won’t add up. And it may lead them to seek other loans that cut into their pensions even more.

No defense

So do the companies have a defense for their action, other than the motivation to make as much money as they can in exchange for a service geared toward people who have no alternatives? They didn’t offer one to The Times; all representatives of the companies declined to comment.

It’s easy for those who are more financially secure to blame the borrowers. Perhaps some were careless. Perhaps they dug themselves in with credit card debt, which is up to an average balance of $8,000 for households of people over 50. And yes, it may be that naive people, frustrated by their inability to get ahead, desiring to do something for themselves or their children right now, fell for the advertising by companies that provide these loans.

Favorite targets of ads that encourage people to splurge, as in a dream vacation or something similar, are apparently military people. That’s especially troubling because so many of those people are on fixed incomes and served their country, perhaps suffering a disability along the way.

And those who can’t obtain conventional credit probably pay more attention to the cash than they do to the fact that interest rates on their loans are higher than those on credit cards, which in many cases carry huge interest rates of 20 percent or more. (Another trap that enslaves people to their creditors, in many cases forever.)

A good watchdog

The federal Consumer Financial Protection Bureau, the same agency that keeps its eyes peeled on credit card companies, is looking at these types of loans, and that’s good. This agency could prove to be, for millions of Americans, the most helpful in the federal government in terms of alerting people to the hazards posed by special offerings in the financial industry and on its fringes. (And to think Republicans and bankers fought against the bureau when the president proposed it.)

This unfortunate trend in borrowing money needs to be brought under scrutiny and then under greater control, and the best place to do that is at the federal level.

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