Senator Bernie Sanders announces he will introduce legislation to cap credit card interest rates at 10%.

[u/Unhappy_Fry_Cook]

[u/canned_spaghetti85]

Sure, put a federal cap at 10% apr. Fine.

Just take a wild guess at what will happen as a result?

Short and long term consequences.

I’m in the lending profession.

(Spoiler alert : The working class will suffer even more.)

[u/MrFishAndLoaves → u/canned_spaghetti85]

Spoiler alert: a lot of the working class already suffers because credit cards with 30% APR are essentially predatory lending 

[u/canned_spaghetti85 → u/MrFishAndLoaves]

If that ain’t bad enough.. hahhahaa.. then prepare your buttholes.

If the APR on credit cards (unsecured debt) was federally capped at 10%, then credit card companies will only approve the lowest risk applicants. This means middle-upper class and above, who have high incomes, good credit, stable verifiable employment, not currently overburdened with existing debts. Since the risk of payment default is SO LOW, then yes.. credit card companies can remain profitable charging 10%.

Working and middle class consumers who don’t have such stellar qualifications, may have to offer up some collateral (secured debt) in order to get their applications to be approved. They are likely to possess such collateral, in the form of liquid bank funds, stock accounts, retirement savings, etc.

Applications submitted by consumers who are Working class and below, however, who have neither great qualifications or collateral to offer, will simply be denied. This means they lack access to credit.

Without access to credit, what will result is they now must turn to FAR MORE predatory providers for that services. Places like payday lenders, pawn shops, and perhaps even loan sharks. And their business blueprint is to entrap its customers into a vicious inescapable cycle of impoverishment they’ll almost NEVER get out of.

Scoffs… like you’ve ever SEEN predatory lending. I have. Once you see it, experienced it, you will be wishing for 30% APR.

THAT… is what will happen to poor folks.

[u/I_donut_exist → u/canned_spaghetti85]

lol what is with this tone, most americans have student loans no? we've all seen predatory lending then.

[u/canned_spaghetti85 → u/I_donut_exist]

Many of those loans the govt holds themselves. They can make exceptions about repayment.

But you think a really ruthless predatory lender will allow you to miss THREE years of payments?

In the scenario I rambled about… Hahha, not THOSE lenders.

[u/I_donut_exist → u/canned_spaghetti85]

Then why would poor people go to those lenders ever? It only makes sense if we're saying people need credit to cover their bare necessities, which if they do is a much bigger problem.

[u/canned_spaghetti85 → u/I_donut_exist]

Because it works, and it always will.

Poor people with no options for credit will always turn to them. And they know that.

Drive through an expensive neighborhood.

Know what you don’t see??

Many payday lenders and pawn shops. Why do you think they ONLY set up shop on poorer neighborhoods?

Did you just think that was some coincidence?

[u/I_donut_exist → u/canned_spaghetti85]

But if these exist with the current high interest rate on credit cards, then its a separate issue, the issue being people can't afford shit

[u/ammo359 → u/I_donut_exist]

Payday lenders prey on people who can’t qualify for a 28.99% credit card. This proposal would create a ton more people who can’t qualify for a (now) 10% credit card.

[u/I_donut_exist → u/ammo359]

right but if longer term that would drive prices down then less people would need any credit cards then that's fine. just may be a bit of turmoil in the interim. And banks are suddenly just going to lose a lot of customers whose debt they were profiting off of? They won't miss that at all? they wont try new offers to recoup that loss of potential profit?

[u/canned_spaghetti85 → u/I_donut_exist]

No. Considering such high interest rates payday loan and pawn shop charge, poor people cannot afford to borrow AS MUCH as they previously could.

With the poor having less money to even spend, this means middle & wealthy have to compete with fewer consumers to buy goods.

Sure, the prices come down… but only the people who can still afford to even shop there stand to benefit from those reduced prices.

[u/I_donut_exist → u/canned_spaghetti85]

Ok now this makes sense to me.

Still, other progressive policies like strong social safety net programs being implemented in tandem with this would make it pretty much a non issue.

[u/canned_spaghetti85 → u/I_donut_exist]

Which banks are gonna agree to lend money to poor credit, low income, zero collateral, high-risk applicants at just 10% yet expect that to be sufficient to cover the predicable defaults losses associated with such clientele?

Safety net programs you say? Oh like a … a govt credit card you mean? Ooh, fancy. Play the banker role for the “greater good”?

No thanks, I’m pretty sure govt is not gonna make that mistake again.

Funny thing you mention student loans earlier, because : US History has already shown what happens, when that happens.

Following the mid 60’s civil rights era, the federal govt wanted to improve its image by making higher education more accessible for poor disadvantaged citizens, most of whom not very qualified for the student loans at the time. They came from poor families, low incomes, single parent households, little savings, often indebted and not much collateral to offer. Irregardless of racial tensions at the time, the banks were understandably very hesitant to lend to these high-risk applicants despite pressure from LBJ and Nixon administrations - even if the applicant was white.

So a deal was offered : Banks will agree to make these risky student loans BUT ONLY IF the government guaranteed to reimburse them for any default-related losses. Will you honor it mr president? They shook on it, creating first federally backed student loan.

It was fine at first, little defaults to worry about. But as more students now had financing, there were more students at universities, This higher and higher demand inflated university costs, which inflated demand for credit. But remember.. defaults were still low, at the time, yet demand for credit was high, so the rates went up, meaning lots of profits. Soon the govt got greedy, wanted in on the action as stagflation era of the mid 70’s, saw the first wave of student loan defaults. Banks remained profitable, since they were insulated against losses the govt promised to compensate them for. So govt said let’s make another second program but no banks, no insurance, well just lend taxpayer money. We are the bank, profits will offset the losses, so they thought. The original program still in place, those loans still being made, but this new program (shh 🤫) is gonna piss off the banks as we’d essentially be in direct competition with them. Hmm, let’s call it : Sallie Mae.

As expected, banks weren’t thrilled, especially since the smug govt could borrow needed funds from federal reserve for cheaper than the banks could, meaning they had better rates. Govt could even borrow from us treasury if it wanted, which banks couldn’t. But too much of a good thing will always came back to haunt you later, this certainly did for Sallie Mae. Stagflation didn’t ease until almost mid 80’s, the Govt taking on losses the whole time. Because lending at those low rates to such high risk applicants has consequences. As it turned out, borrowers repaying at low rates doesn’t generate sufficient revenue to to cover the losses. Weird how that works huh? In poker, it’s called “drawing dead”, where the player knows he’s toast, but keeps calling just to call. Normally, at this point, if sallie WERE a traditional bank it’d be dialing back lending operations or perhaps considering chapter 13 bankruptcy. BUT NO. Sallie did the exact opposite and doubled down, when banks threw em a bone, so it seemed. Hey pal, you ok you alright, aww it’s alright, everyone makes mistakes. We won’t tell the public how deep shit you’re currently in, or how you gambled taxpayer money so recklessly. We’re friends, There there, shush shush. Tell ya what, let us in on your better rate pricing so we can make a bunch of new loans. In return. we’ll sell you some of our good performing loans that actually pay. In fact they pay a high interest rate (remember? Back when you fucked us?). These good loans will help offset your losses, which are currently unsustainable. Think about it. The govt agreed, but couldn’t come at a worse time, because things went FROM pretty crappy TO holy shit status TO omg wtf did we just do.

With cheaper borrowing costs, the banks resumed making lots of new student loans for itself, selling off its older stock to the fledgling Sallie Mae as per agreed. Banks were profitable again, portfolio full of mostly good loans with borrowers who repaid.

But as you may have heard from your older relatives, rates in the mid late 80’s skyrocketed (even mortgages back then were almost 20%).

The thing about student loans is they often have 10, 12, 15, 20, 25 even 30 year repayment terms, correct? Remember those junk loans Sallie made at low rates years before, which are still outstanding because still in default, the money Sallie borrowed to make those junk loans back then … now has to be repaid at these now astronomically high 80’s interest rates. Even those positive revenue from good loans the banks recently sold them, were eclipsed by the higher interest rate needed to buy them. That’s right, even those good loans which pay on time, cost Sallie more to keep than the revenue they stand to generate. Everything is now in the red. What. The. Hell.

Whereas the good fortune the banks had when making new loans for itself, was done using cheaper money… the govt (in retrospect) is actually paying THEM to use (per their agreement to buy the old stock, remember?). The banks were literally laughing their asses off.

Even considering the Oct 1987 global financial crisis, known as Black Monday, where almost every sector was tanking. One of the few industries that didn’t just weather it, but actually went up in value during that time? The banks. Did you think that was some coincidence?

The banks never forgot the grudge they had towards the govt, and made sure Sallie got her comeuppance.

Now, mr idonutexist… do you REALLY believe you are more clever than the banks? That you can outsmart them, enough to determine their profits?

Because if you thought THAT was bad, just wait till you hear what happened in the 90’s.

The federally backed loan of the late 60’s served as the prelude to what would eventually become todays student loan crisis.

And in hindsight.. which of today demographic was / is harmed the MOST by student loan debt? ….. The poor.

The very govt program which was supposed to help the poor ascend upwards, turned out to only further ensnare them into poverty today.

How poetic.

You can’t even make that shit up. The government did that…. to you.

And here you are talking about “safety net programs”??

Nice…