The greatest threat

What are the biggest threats to our financial well-being? What’s the quickest way to impoverish people? What’s the worst thing you can do to threaten your quality of life?

It used to be loan sharks, or perhaps I should call them by the politer name, micro-lenders. This was an industry that was largely out of control. It had some decent, law-abiding providers but was dominated by a vast number of extremely shady characters. There were loan sharks we found that operated from car parks, others from fried (not grilled) chicken outlets and even a few that were run from government offices by public servants earning money “on the side”. These were the organizations that would charge up to 30% interest each month and who would make it quite clear how much they would hurt you if you failed to make the necessary repayments. Hurt you financially but also, very occasionally, hurt you physically.

But that’s changed a lot recently. Now the Non-Bank Financial Institutions Regulatory Authority is in town. These guys have the legal authority, and more importantly the will-power, to take these guys on. They’re beginning to pile on the pressure and force the micro-lenders to register themselves and operate in a fairly decent manner.

It’s not done yet though. We phoned some micro-lenders recently and pretended that we wanted a loan. We asked how they operate and what we had to do to get the cash. Despite NBFIRA making it crystal clear to the entire nation that it was illegal, we still found a lender, one whose name I bet you would recognize, who said they would take the borrower’s ATM card and PIN from them to make sure they got the money back.

We’ll be passing the name of the lender and a recording of the phone call we made over to NBFIRA so they can take this further.

However the good news is that NBFIRA IS having an effect and with a little luck the scoundrels behind some of the loan sharks will soon be out of business. We’re not so lucky when it comes to stores that sell on credit.

Store credit presents several dangers. Firstly there’s the interest rates they charge. It’s perfectly normal to spend twice as much for an item if you buy it on credit than if you had bought it for cash. Sometimes it can be three times as much. We once saw an advertisement in a store window for a bedding protector that was available for cash for P199. If you bought it on credit you were asked to pay a deposit of P72 followed by 24 monthly payments, each of P70. That’s a total repayment of P1,752, nearly NINE times the cash price. Luckily we’ve now persuaded almost all the stores that sell on credit to obey the law and make it clear to customers in the adverts what the total credit price will be.

Then there are the contractual terms you agree to when you buy on credit. Well, you often don’t truly agree to them because you often never see them until it’s too late. Many furniture stores refuse to let you take the time to read the contract before you sign it. Almost all the stores we investigated refused to let a potential customer take the contract away with them to read it overnight. That can only be because they have something to hide. Something they don’t want you to know before you sign away all your money.

More worrying than these deceptions though is the gullibility that we customers often demonstrate. Just recently a reader contacted us with a problem.

In June 2010 he bought a TV and decoder from a store on credit. Six months later he started to have problems with the repayments. He claims that he spoke to the store but they weren’t prepared to be flexible. He continued to pay half the agreed amount but that wasn’t enough for the store. Not long afterwards the store came and repossessed the TV and decoder.

He said:

“I was surprised that on 28th May I received an sms from a company telling me I owe the Shop. I am a bit shocked because they took their things and would not talk with me so how is it that I have to pay for things I don't have in my possession. I would have thought the reason they reposed the items was to sell them and recover the money so am surprise that they take stuff from me and tell me to pay it again it does not make sense, I believe its fraud. Please assist me.”

I know it’s frustrating but this isn’t fraud. It’s store credit. Yes, they did take the TV and decoder back and no doubt they sold them to someone for a fraction of their real value. That amount was set against his remaining debt but it won’t have had much of an impact on the amount he owed them.

What he’d forgotten, or never understood, is that he had originally agreed to pay the store a large amount of money, considerably more than the actual value of the goods, over 24 months. That money, those repayments are what they want more than anything else. They’re not going to let him avoid that. That’s how they make money.

A few years ago a furniture store Managing Director confessed to us that his core business wasn’t actually furniture. It was money-lending. The furniture store business model is to sell us the cheapest and nastiest crap they can get away with and make as much money from the credit deals they want us to sign. That’s how they make so much money and it all relies on our massive gullibility. We need to stop being gullible while we can still afford to.