How to stop predatory lending
A common rule of thumb by many financial experts in The Bahamas is that there are two distinct areas of the country’s banking sector – the retail/commercial banks and the offshore banking sector. The retail/commercial banks are the banks that most people use to execute daily financial transactions such as deposits, withdrawals and to get consumer loans. Some of the retail/commercial banks have been accused of predatory lending practices in The Bahamas. Predatory lending is classified as any unscrupulous actions carried out by a lender/bank to entice, induce or assist a borrower in taking a loan that carries high fees and a high-interest rate.
The sad reality is that this practice happens more regularly than you would think in The Bahamas by our retail/commercial banks. There are some banks that have undoubtedly led the way in handing out loans for things like vacation, back to school, prom, furniture and even generator loans. Some people adamantly defend getting these loans and provide vague reasoning for why they chose to secure those kinds of loans.
Let’s break down the negative aspects of predatory loans and how they affect you in the long run.
Firstly, it’s a debt trap. Once you have taken out one predatory loan, you’re likely to end up getting another to make ends meet, trapping you in an ongoing cycle of debt. And let’s not forget the interest rates associated with these loans. The usual victims of predatory lending in The Bahamas are permanent hotel and government employees. This is the case because the banking institutions can assure that salary deductions are put in place for these employees, which pretty much guarantees that they will receive their monthly payments before it hits the borrower’s bank account. I’ve seen many young civil servants like police and defense force officers secure auto loans within months of being employed simply because the banks know that their funds are secured.
It is a well-designed plan by the banking institutions with strategies to find new victims for predatory lending that focuses on persons with low income. The banks attend job and benefit fairs at various places of employment, where they distribute their loan information and pretty much market their products. We all see and hear the ads through TV, radio and in some cases via direct emails. I completely understand and appreciate the need for a company to sell their products to consumers, but there comes a time when you’ve overly exerted an opportunity.
These predatory loans are harmful in the long term because it damages your credit and ability to get meaningful loans in the future like a mortgage or possible business loan. The most effective way to solve this financial epidemic, in my opinion, is by creating laws that will protect borrowers and enforcing them. Protecting people from themselves is something a government should do and in this case it is needed.
There is something called a debt service ratio or debt to income ratio.
The Central Bank of The Bahamas has a debt service ratio threshold that they advise all retail/commercial banks. They are advised that they should not approve loans for persons with a debt service ratio between 40 percent to 45 percent, but this is sometimes overlooked.
Your debt service ratio is calculated by simply adding up all your monthly debts – rent or mortgage payments, predatory loans, student loans, auto loans, credit card payments, child support or whatever monthly obligations you may have – and dividing the sum by your monthly income. For example, if your monthly debt equals $2,500 and your gross monthly income is $7,000, your debt to income ratio is 36 percent. (2,500/7,000=0.357). You should do your own calculation and try your best to stay in the 30 percent range.
There needs to be more penalties for banks that thrive in the practice of predatory lending, approving loans for consumers who already have a tough time making ends meet. Once the consumers are protected, this will end predatory lending and lead to a better financial life for many.
• Quinton C. Lightbourne is a certified financial planner with the Chartered Institute of Bankers in Scotland and vice president of the Bahamas Investments & Securities Business Association (BISBA). E-mail: email@example.com.