By now, everyone who hasn’t been hiding out under a rock has heard about the subprime mortgage fiasco. Banks lent money to people who didn’t qualified for it by using twisty, unethical strategies like “liar loans” (literally falsified loan applications, which is otherwise known as loan fraud), the deliberate targeting of people who weren’t in a position to understand what they were getting themselves into and slick sales pitches designed to hide the true cost of interest rate jumps, exorbitant fees, balloon payments and other surprises. As a result, wave after wave of foreclosures, bank failures and other financial disasters have been racing through the American economy (and the economy of other countries).
So what does that have to do with self-help? Simply this: The subprime crisis is directly related to the skewed way we as Americans look at money, debt and personal wealth, and how we act on these views. Until we learn to recognize these issues and take steps to eliminate them, history will simply repeat itself in more and more damaging ways.
Most IVA providers will require to owe at least £10,000 to at least two separate creditors in order to begin proceedings. Head to Money Expert for more information and to find out if you could qualify and start reducing your debt right away.
Here are some of the issues that lead to the subprime mortgage collapse. Do you recognize any in yourself? If so, how are they affecting your decisions, and what sort of danger could you be letting yourself in for?
1. Short-range vision. According to scientific research, humans are wired to be more emotionally responsive to short-term gains than long-term risks. In fact, when offered a small reward now or a large reward later, people usually opt for the immediate prize even when it is significantly smaller than what they would receive if they were to wait. As science blogger Johan Lehrer sums it up, “Our feelings are thrilled by the prospect of a new home, but can’t really grapple with the long-term fiscal consequences of the decision. Our impulsivity encounters little resistance, and so we sign on the bottom line. We want the house. We’ll figure out how to pay for it later.” (http://scienceblogs.com/cortex/2007/08/the_psychology_of_subprime_mor.php)
2. Entitlement. In the American constitution, you are given the right to the pursuit of happiness. However, if you ask around on the street you may find something a bit unsettling: More and more people today believe that humans have more than just a right to pursue happiness – they have a right to happiness itself (which is simply an impossible and unsustainable belief; happiness doesn’t do command performances). As a result, people believe that just because they want something (or feel it would make them happy) they have a right to have it, regardless of whether they’ve earned it, can afford it or even understand what it is they’re getting into. As a result of this feeling of entitlement, people eagerly signed up for loans they had no possible way (or, in some cases, no intention) of paying for. It’s enough that they wanted it; little or no consideration was given to any other issues.
3. Visible affluence vs true wealth. These days, wealth is all about status, not careful investment. SUVs are promoted as the preferred ride of the rich and famous and suddenly everyone has to have one, even if the most they ever haul around is a Teacup Chihuahua huddling in the corner a Prada bag. Ditto for houses – it’s not enough to buy a house anymore. You have to buy a sprawling monster of a house with granite counters, a sunken pool and a gym – the real estate equivalent of oversized bling – even if your entire household could fit comfortably in a Mini Cooper with room leftover for a lunch basket. Creating true wealth through steady investment, earned interest and saving money just isn’t sexy enough. “Better to show it than grow it,” seems to be the motto of today’s psuedo-wealthy.
4. Hubris. It’s one of humanity’s biggest failings; the belief that even if we somehow paint ourselves into a corner, we’ll just magically sprout wings to get us out of the tight spot. Unfortunately, economics isn’t known for its susceptibility to magic. And when homeowners found themselves facing double and tripled mortgages as their interest rates (predictably) adjusted, no fairy godmothers materialized to wave their wands and make things better. Hubris is probably the number one killer of personal wealth; the belief that you can do no wrong has been the downfall of many a would-be self-made man (or woman).
5. The lure of easy debt. Obesity is epidemic in America. Only in this case it’s the average American’s debt load, instead of their waistlines, that are bloated beyond sustainable proportions. Related to the “right to happiness,” the ready availability of credit colludes in making it easy to act on the belief that you should get what you want, even if you can’t afford it. Almost everyone in the country is used to simply relying on credit for everything from houses to chewing gum. And lenders made it easy by handing out easy credit to anyone old enough to sign a contract, regardless of their credit history or likely ability to pay back their debt. We’ve become a buy now, pay later culture. Only, with extortionary interest and other hidden fees that can explode even a small debt into a Hindenburg-sized mess, most of us will be no more capable of paying for it later than we were at the time. Oh, the humanity!
So how do you prevent this sort of thing from happening to you? By realizing three things. First, nobody owes you anything – not even happiness. You want it, you have to earn it – and pay a fair price for it, to boot. Second, learn to be happy with what you need, rather than straining after what you think makes you “look good.” No matter how impressive that McMansion looks when you’re house hunting, bankruptcy flatters no one. And third, live within your means. Buy what you can afford now, not what you hope to be able to afford at some future date. Life is unpredictable. Even if you’re on a seemingly straightforward earning track, anything could derail you or change your course. Don’t bet your entire future on a short-term reward that relies on everything going as planned.
Thanks to Financial Learn for including this article in the Carnival of Financial Learning, to Credit Card Lowdown for featuring this post in the Carnival of Money, Growth, and Happiness, to Broke Grad Student for publishing this article in the Festival of Frugality, to Pinching Copper for inclusion in the Finance Fiesta: Cerveza Edition, to The Skilled Investor’s Personal Finance Blog for featuring this article in the Carnival of Financial Planning, to Frugal Homesteading Blog for publishing this article in the Frugal Homesteading Blog Carnival, and to Everything Finance for including this in the Carnival of Everything Finance.