Sen. Gramm has been credited with coining the term "predatory borrowers." Like Reagan's "welfare queens," the caricature of the "predatory borrower" falls into the same category for me as Santa Claus. They are all interesting fictional characters that make for some good stories but have long since lost their resemblance to reality. "Welfare queens" were a tall tale based on the fact that there are some people for whom our social safety net becomes a dependent crutch. "Predatory borrowers" are based on the fact that there are some people who signed papers and entered into financial agreements that they did not read or understand (I have even heard a few accusations of planned bankruptcy). Santa Claus -- well, the real St. Nick --probably had a beard and might have even handed out a few presents.
While I don't think I can be blamed for the collapse of our entire planet's economic system (I do hope our readers extend me this grace), by Sen. Gramm's thinking, I'm a big part of the problem. Yes, I am probably a "predatory borrower," or at least I can relate with them. While my tale of woe will not cause my economic devastation, it very well could cost me several thousand dollars over the next few years, and I have learned my lesson.
It happened about a year ago. I got a call from the bank that holds my student loans. The kind woman on the other end of the phone asked me if I would be interested in consolidating. It would be the simple process of bunching all my loans together and slapping one interest rate on them. "If you consolidate today, sir, your monthly loan repayments will drop by $50 a month! Would you like to consolidate?" I asked about possible fees, I asked about interest rates, I asked about my various repayment options. She answered every question cheerfully and in no time my loans were consolidated.
The next month, I found out why. I got my student loan statement and, just as promised, it was $50 less a month. What I hadn't expected, however, was that the term of my loan had been extended by five years. My 10-year repayment schedule had become a 15-year repayment schedule. With the interest extended over those extra years, my total repayment amount would be thousands of dollars more.
A few weeks later I got a phone call from another bank explaining that they had just bought my loan. "Don't worry," I was assured by another kind woman on the phone. "Nothing has changed."
But something had changed. Me. I'm lucky that I learned this lesson with my student loans instead of a house. My payments are less, so I will not default. There is no penalty for paying early, so I can simply increase my payments and avoid much of the interest. But my naiveté is gone. I thought that the woman on the other end of the phone was there to help me. I thought she was providing me with all the information I needed to know to make a decision about what was in my best interest. I thought I was in a long-term relationship with my bank. I thought the interest that I was paying on the loan was not only for the money borrowed but for the help of a financial expert who would help me navigate my first significant debt. They work for a bank; they must know more than me; I should listen to their advice. I was wrong.
I am endowed with enough "street smarts" to be wary of the guys who peddle goods on the subway, but I did not have the smarts to be wary of an S&P 500 company. I did not realize that the person I was talking to had no interest in anything that happened to me after she made the deal and hung up the phone.
I have to imagine that many of the "predatory borrowers" out there who are now getting kicked out of foreclosed homes were in the same place as me. They walked into an office and assumed the person on the other side of the desk cared about what happened to them after the deal was closed. "Certainly," they would assume, "I could repay this loan. If not, why would they offer it? I came to a professional. Wouldn't they know? If I fail, wouldn't they be hurt, too? It's in both of our interests if they set me up to succeed, right?"
Tim King is the special assistant to the CEO for Sojourners.