Critics of the loan industry claim that lenders make it difficult to assess what they, and in particular, online lenders, charge for loans to small businesses. They argue that since interest rates on such loans can reach more than 100 percent annually, few government mandates on disclosure of rates, fees, and other charges exist, and disclosure is desperately needed.
This information is available for the asking. It is not a secret. In the rare event the borrower’s request is rejected, the borrower should walk away and seek the loan from a competitor. This is a competitive industry.
Because the terms and conditions of the loan, including interest rate, are determined by market conditions plus borrower risk characteristics, the final loan terms are not known until negotiations are completed. When a borrower calls a lender and asks if a 5 percent loan is available – and after some discussion the lender may say “Come in and we can talk about that” – the lender is not making an offer of a 5 percent loan, but issuing “an invitation to negotiate.”
But to aid the negotiating borrower, critics are calling for the basic terms of loan offers to be expressed in a standard format. This will help, but in an insignificant way. Even the authors of one such plan admit to that.
A good reason that borrowers, especially those who feel educationally inadequate, are reluctant to seek this information from lenders is that they do not know what to do with it even when they get it. They lack the knowledge, the analytical tools for evaluating these facts. Even if regulators succeed in flooding borrowers with loan information, it will likely be for naught unless, of course, borrowers are provided with the necessary education.
In sum, under current conditions, such proposed regulations are of little use to most borrowers and a waste of government resources.
Not wasteful, however, is a plan for the educational development of our children. Employing these resources for an effective, broad educational program in all public schools at the K-12 level would be one of the wisest uses of such funds. It would attack this problem and more. Let us examine some of the benefits.
The broad objective of the program is to provide students with a solid foundation in economics and finance. Understanding how our economy works is crucial for informed citizenship, but vital to comprehending how to make basic personal financial decisions. This leads to graduates becoming more informed shoppers for mortgages, leases, vehicle purchase contracts, annuities, retirement plans and life insurance, to name a few of such contracts.
The quality of life, and of living, is enriched in many ways. Armed with this understanding, the graduate faces a larger array of choices, an enhancement of personal freedom and more skilled at shopping and negotiation, thus potentially stretching his income markedly. But the benefits reach beyond a more confident decision-maker. More discriminating shoppers lead to increased competition in the market place: better prices, better service.
This worthwhile environment is attainable without the increased burden of more dubious government regulation. Savings captured by the rejection of the earlier proposed increased in regulatory costs becomes a win/win outcome for the taxpayer, even though would-be regulators might now find their employment in more productive occupations of greater benefit to society. Moreover, these same tax-savings are potentially available for supporting the proposed educational programs. But this issue must be negotiated by enlightened leadership with vision and energy.
There are sparks of creativity on the passing scene. For example, the Dallas school board recently mandated a course in personal finance for high-school graduates. The St. Louis Federal Reserve Bank is providing assistance to school districts in the form of readily available video lectures on economics and finance. Available for classes from K-12 grade levels, they are geared to the maturity of the student. (For further information, school district superintendents can email email@example.com.)
Mandating regulations that provide modest information on loan prices will contribute virtually zero benefits to many potential online, or small-business, borrowers. Their problem is: how does one negotiate for the significant loan information? This requires a mentor and experience.
But the far more important problem is: How does one confidently analyze loan offers once they are at hand? For the mass market of millions of existing small-business borrowers, the burden of education rests on them. But a huge step toward providing their children with this education can be introduced now at the grade-school level.
Perhaps Karen Mills – the former head of the Small Business Administration and a fervent advocate of the suggested token-benefit, standard-format approach – could lend her support for the broad development of the extremely beneficial economics and finance program.
The writer is a professor emeritus of financial economics at the University of Georgia. He lives in Aiken, S.C.