The same "subprime mentality" that caused banks to sell and bundle risky mortgages is once again creeping back.
In Orange County, Chapter 7 Bankruptcy Attorney Vincent D. Howard of HOWARD LAW has noted an increasing number of clients who have been granted loans for homes and credit cards that they actually couldn't afford in the first place. Banks are effectively relaxing the criteria needed to meet the criteria for these loans.
The problem with this, of course, is that when you have debts you can't afford, you risk getting in over your head with debt. When this happens, you may need consider filing for a bankruptcy or seeking help in reaching a debt settlement.
This same phenomenon has been noted by Credit Karma, a California-based company that tracks consumer creditworthiness.
There will undoubtedly be a refrain from the masses saying, "If you can't afford it, don't do it." The fault with this statement, though, is that consumers assume that if banks - particularly in this post-recession economy - would approve them for a line of credit, that they actually do qualify and can afford it.
And secondly, the interest rates aren't very high, as they would normally to signal a risky deal. Government overseers have played a role in keeping these lending rates at historic lows, but this has meant that banks are increasingly desperate to dole out their cash. So the requirements for credit cards, auto loans and even mortgages have begun to relax.
The one bit of encouraging news is that the banks haven't seen scores of people taking them up on their offers, probably in part because they can't even afford the lower interest rates.
According to Credit Karma, Americans borrowed roughly $2.7 billion in July. That's a lot, but it actually represents the first drop in borrowing that we've seen in nearly a year.
Plus, in the two years leading up to August, the credit card debt per credit card holder fell from $7,700 to about $5,400. Then you have the average mortgage debt, which dropped from about $175,000 to about $167,000 during this same time frame.
Some have said this has to do with Americans becoming more guarded with their money. But when we start to examine these figures a little deeper, we find that bankruptcy has actually played a large role in allowing Americans to significantly reduce their debt load.
According to the Administrative Office of the U.S. Courts, there were more than 1.5 million bankruptcies filed between June 2010 and June 2011, and another 1.3 million between June 2011 and June 2012. As of June 30, 2012, there were another 1.6 million bankruptcies pending.
Still, people continue to rely heavily on credit. The average credit card debt per household is about $15,500.
If you get roped into a line of credit or an auto loan that you really can't afford, you end up struggling just to pay the minimum payments. And even if you do get that debt paid off (many years down the road) you end up paying double what you otherwise would have.
Here's the truth: Only about 19 percent of the country has a FICO score that is within the 800 to 900 range, which considered good. About 35 percent of us have scores that are in the mid-range of about 700 to 800. The other 46 percent have either little or no creditworthiness. If the terms of a loan sound too good to be true, take a step back, and consider whether they actually are.
Orange County Bankruptcy Attorney Vincent Howard at HOWARD LAW can help. You can reach us toll-free at 1-800-872-5925 or send us a message online.
Banks giving risky loans to strapped consumers, Sept. 16, 2012, By John Aidan Byrne, New York Post
More Blog Entries:
Banks Blamed for 800,000 Unnecessary Foreclosures, Sept. 5, 2012, Orange County Chapter 7 Bankruptcy Lawyer Blog