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Who Pays the Cost of Bankruptcy?See also: Who Pays the Cost of Bankruptcy?It's certainly no secret that the number of bankruptcies and loan losses in the financial industry have reached an all time high. In 1996 alone, 1.1 million Americans and almost 43,000 Marylanders opted to cut their financial losses by filing for bankruptcy. The number of bankruptcy filings in Maryland increased more than 40% over 1995 statistics. Startling statistics such as these leave us with one significant question. Where does the money come from to cover these ever increasing losses and who pays the ultimate cost? The answer is you, the consumer. The average consumer may believe that because they have not personally filed for bankruptcy, they are unaffected by this trend and financial burden. But in reality, it is the consumer who repays their debt in full and on time, that actually ends up paying the true cost of bankruptcy. How? By paying higher than necessary rates on loans regardless of their individual credit history. This rise in bankruptcies and loan losses has forced financial institutions to look at their lending policies and develop alternative guidelines for granting credit. One alternative is to tighten loan underwriting criteria making it more difficult for borderline borrowers to receive credit. The problem with this solution is that it often pushes the neediest of borrowers to finance companies who charge the highest interest rates allowed by law. A second and better solution is to adjust the interest rate on loans based on the level of risk associated with the individual borrower. By doing so, the borrower is directly responsible for their past credit management. Good news for some, not so for others. Still, the risk-adjusted rate for high risk borrowers at credit unions is still lower than the rates charged by banks and financial companies. For credit unions, risk adjusted lending is an especially appealing alternative. Because credit unions are nonprofit, cooperative financial institutions, their account holders are also their owners/members. When a credit union experiences high loan losses, every member in that organization can be affected if loan rates are increased "across the board". Through risk adjusted lending however, loan rates are not raised across the board, but instead adjusted for each individual member based on their own credit history. But perhaps the greatest advantage of risk adjusted lending is that everyone has an equal opportunity to control their present and future credit management. Borrowers with exceptional credit benefit because they receive the lowest loan rates possible. For borrowers with problematic credit, risk adjusted lending allows for periodic reviews of credit reports which could result in lower interest rates as their credit history improves. Many members are unaware that the debt they have accumulated has them living on the edge of bankruptcy. Too often, excessive debt is seen as just a fact of life instead of the formula for financial disaster that it eventually turns out to be. Don't let this happen to you. Bankruptcy is often seen as an easy way out of irresponsible spending instead of a life jacket for someone who has experience a personal or financial catastrophe. Financial Dimensions, Inc. |
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