Truth in lending (Part 2)
In my previous discussion of the Truth in Lending Act (18 February 2021), I laid down my assumptions that, first, the interest rates stipulated in the promissory notes are checked by the banks to be in accordance with law; second, the borrowers are issued disclosure statements; and, third, the borrowers consent to the loan terms. Notwithstanding these assumptions, borrowers still complain that the interest rates charged on them are exorbitant. I will attempt to analyze how such situation comes about.
It is true that the interest rate is included in the disclosure statements but in many cases, the borrower consents to the loan, not on the basis of the interest rate, but on the basis of affordability. A simple example is a consumer who is attracted by a sales promo for a ₱50,000 cash all in, inclusive of registration and insurance, for the purchase of a compact car. The sales agent graciously attends to him and furnishes him the financing details including the ₱15.000 monthly amortizations for 5 years. The consumer computes his income and concludes that he has that extra amount for the amortization. The transaction is completed and both are in a hurry – for the sales agent to receive his commission and for the consumer to bring home the car. Was there a real analysis by the consumer of the financial aspects of the transaction? Does he have sufficient resources to survive the 5-year amortization period?
When the consumer checks on the affordability of the amortizations, chances are that he has a very limited time zone for his projections. If he has a narrow cash margin remaining after the amortizations and other expenses, the 5-year loan can become an onerous financial obligation since contingencies may occur along the way. There might be emergency house repairs, medical expenses, a wedding in the family, or even business failure or lose of employment. Once he incurs delay or default, he will now realize the extent of the interest he is being charged, together with the penalties being added thereto. A common mistake would be to avail of quick cash loans to tide him over, since such loans also carry interest and penalties, thereby putting him deeper into the debt hole.
Another lesson to be imparted in such term loans is to be mindful of the amortization dates. The borrower should realize that any delay in payment, no matter how short, can result in substantial penalties. A oneday delay, for example, would carry a one month penalty charge since, as commonly stipulated, a fraction of a month is already subject to a one-month charge. If the due date falls on a weekend or a holiday, payment should be made on the preceding business day so as not to be subject to penalties.
To summarize, borrowing carries many financial implications and should never be impulsive. A fifteen- or even thirty-minute stay in front of the sales agent’s desk is certainly not sufficient to be fully informed of the financial extent of the transaction. The prudent move would be to bring home these details for deeper consideration, taking into account realistically one’s financial capabilities. On the part of the lenders, they should likewise consider the financial sustainability of the borrower; otherwise, they lose also in case of default, aside from having to deal with complaints for supposed excessive interest and charges. The above comments are the personal views of the writer. His email address is dezunigajuan@gmail.com