The last time I had to sign a significant financial contract, I took the time to review it closely. I read over the terms and conditions, and if I had questions or concerns, I brought them up with the person I was working with. I refused to accept one clause and renegotiated it. I didn’t sign the contract until I felt familiar and comfortable with it, accepting my financial obligations under the term of the contract and ensuring I knew what those obligations were—the term of the contract, for example, how much I would pay over the length of the contract, fees for early termination.
I didn’t magically spring into being with the skills to do this. I had to learn them. From an early age, my father taught me about money and how it works, not just in the sense of counting, saving, and spending it, but also in the sense of understanding interest and principal, good terms and bad terms, financial trends. While I am not extremely financially literate, and don’t have access to the kinds of funds that would allow me to make major investments, I can make informed financial decisions about basic needs; which car loan or lease is the best option, for example.
For many members of the lower classes, these skills are not so readily available; I was fortunate in that although I was born into poverty, my father had the benefit of an extensive college education and wide life experience. I occupied that strange divide of being economically in the lower classes, but socially and culturally in the middle class. I had many things in common with my fellow poor kids at school, but there were also divides between us; my house full of books, their parents working double shifts at the mill. My knowledge of compound interest, their lack thereof.
Financial literacy is obviously a key component to a healthy and functioning society; without it, people aren’t empowered to make good financial choices, and they are put in awkward positions. One might argue that much of the economic collapse was brought about by actively cultivating financial illiteracy and taking advantage of it. While lenders blame their ‘customers’ (better termed victims) for failing to read and understand the terms of their exploitative loans, one might more accurately say that victims of subprime lending didn’t understand what was in front of them because society never took the time to teach them, and because they were rushed into hasty decisions by people promising things that they didn’t know to be suspicious of because they’d never learned about how finance works.
For banks, there is an active incentive to keep members of lower economic and social classes financially illiterate, because it creates a captive audience that they can easily take advantage of in the lending department. Whether people are seeking personal loans or assistance buying homes, cars, and other major items, banks want to get the most beneficial terms they can—for them. They aren’t as interested in the welfare of their victims, and simply want to squeeze as much profit as possible out of loans; so what if they end up defaulting in the end because the borrower got in over her head.
One consequence of suppressing financial literacy is that many people don’t know how to engage in financial self-advocacy, and are afraid to do so. It’s not just that they don’t know their rights under the law, but that they are afraid to even ask what those rights might be, or to question a situation in a bank. As people sit at the desk through a loan interview, they believe that asking questions might get them thrown out, and result in having their loans denied. Better to remain silent, even if you don’t fully understand the terms of the contract you are signing.
This is a direct consequence of the lack of consumer education on the part of government agencies supposedly put in place to protect consumers. Look, for example, at the FTC and the Funeral Rule, which was supposed to address many of the abuses in the funeral industry. Today, many low-income people are overcharged for funerals and don’t even fully understand all the services they’re paying for, because funeral homes routinely violate the rule and no consumer information is provided at easy points of contact. Hospitals, for example, could provide basic pamphlets about the funeral rule to grieving families, or could offer counseling on options along with grief counseling.
Unfortunately, it’s hard to tackle exploitative practices in industries like cars and real estate, because the sellers of such items (much like funeral directors) are so bound up in the financial industry. Real estate agents and car salespeople have no real incentive to educate their customers about financial options, good choices, and self-advocacy because they want to close a deal, and quickly. They also want to close a high-value deal, because that results in a larger commission. Thus, having a customer who negotiates and self-advocates on the terms to get a more reasonable loan is exactly what they don’t want.
Where do you create opportunities for consumer education? Financial literacy classes are offered in some communities, but their attendees are a self-selected group of people who are able (timewise) to attend classes as well as interested and willing to participate; many people may not think they need financial education, or may not see how they could benefit. Some education is provided in school environments, but notably, low-income schools tend not to provide such extensive financial education, perhaps under the assumption that students don’t really need it because they’ll never have any money.
How do you tackle the problem of a system actively working to prevent self-advocacy on the part of consumers who should have rights and opportunities to access the financial industry without becoming victims of it?