Hiring your way to high living

By Dewi Anggraeni

MELBOURNE (JP): In Australia, a young, good looking person, clad in expensive clothes and driving an expensive car, often make people wonder if he owns all those items. A successful IT consultant may well be rich enough to pay cash for everything that tickles his fancy, however it is also very likely that the person in question is indebted to the bank or some other financial institution for a very long time.

With very few exceptions, people are all falling victims to consumerist urges, some even have fallen beyond salvation. Are human beings in general becoming weaker and hopelessly gormless, or are retailers becoming more aggressive and crafty in advertising their products? No sooner have some products appeared on the face of the earth, that they become unquestionable necessities in everyone's life.

What, for example, did people do before mobile phones?

The compulsion for buying what we are expected to have is one major cause for our perpetual indebtedness to financial institutions. In Australia at least, these institutions are not exactly angels, much as they would like to present that image. Even the banks have long abandoned the basic premise of banking, which was, for what it was worth, "for the good of the public". They have become voracious business enterprises, their ultimate objective being "profit, and more profit". Bank charges are now so prohibitive that more and more pensioners reportedly have resorted to putting their savings under the mattresses.

At the same time, because of our consumerist compulsion, we could not do without these institutions. In fact, we plunge headlong into voluntary indebtedness. Before we even go anywhere near the banks, we are already beckoned by shops offering "hire purchase". People can buy furniture, for example, by putting down a deposit, then paying weekly or monthly installments, in many cases, for years.

For those lucky enough to be gainfully and permanently employed, the banks would happily approve our application for a home loan, provided we have saved enough for a minimum deposit, usually between 10 to 20 percent of the price of the house, to be paid off in five to ten years on approximately seven to nine percent interest rates. Of course, a responsible bank would then verify our salary, our existing financial commitments and our potential capacity to pay without overexertion. So a sole income earner in a family of five with an annual salary of A$50 000 will not be given a home loan of A$500 000, even if there is every indication that a rich elderly aunt is dying, leaving him an inheritance which would make the bank manager green with envy.

Banks will extend loans beyond those for buying a house. A person with reliable credit rating can receive approval for a loan for home renovations, further education, a car, a boat, even a holiday, if the bank still deems the amounts, usually between $4000 to $25000, within his capacity to pay.

Brendan, 35, a sole breadwinner for a family of four, an IT consultant with a very successful business, is paying off his house, his car - a SAAB - and buys almost everything with credit cards, for which he has very generous credit limits.

"I have long sold my soul to the bank," joked Brendan, "but obviously they still trust me because of my income projections."

Curiously, credit rating plays an important role in obtaining a loan. Isabel, 45, a divorcee with grown up children, who has very few financial commitments, wanted to start a small business, but found it difficult to secure a business loan. So she finally obtained a personal overdraft of a very limited amount. "It's ridiculous really," she said, "I didn't have a good credit rating because I had never borrowed from the bank. When we were still married, my husband always did. So I had difficulty convincing the bank that I'd be able to pay them back in the time specified."

Unfortunately, for those the banks regard as lacking in credit rating, often the alternatives are loan sharks, who go under different names.

One of these is called "Payday loans", for those who fall short of cash a week or two before payday. They are some kind of finance companies, who give loans of relatively small amounts with very high fees. The borrower writes a personal cheque, payable to the lender for the amount he wishes to borrow, plus a fee. The company then gives the borrower the amount, minus the fee. The fee can be as high as $50 for every $100 loaned. If the loan is extended, for another two weeks, for instance, fees are charged for each extension.

The only legal protection these borrowers have is the Truth in Lending Act. Under this Act, the cost of any type of credit must be disclosed. So the borrowers must receive in writing, the finance charge and the annual percentage rate. However, when people are desperate, they would agree on anything, it seems. And it is easy to see, with some exceptions, the ones more vulnerable to loan sharks are the less well-off.

For those really down in the dumps, fortunately there are still organizations like Brotherhood of St. Lawrence, St. Vincent de Paul and the Salvation Army who would extend a helping hand in a limited way.

As for the banks, of course we must understand that they are not charitable institutions. They have a business to run.