I am no banker or financial expert, though I did study Financial Management years ago. Giving easy credit to consumers in one reasons for the post year 2000 economic booms in the Western countries. Here’s how the do it during the real estate boom:
"In the United States in the first decade of the 21st century there are many storefronts offering such loans. Some are old — Household Finance and its sister Beneficial, for example — and some are newer-fangled, like CitiFinancial. Both offer credit at rates over thirty percent. The business is booming: the spreads, Wall Street says, are too good to pass up. Citibank pays under five percent interest on the deposits it collects. Its affiliated loan sharks charge four times that rate, even for loans secured by the borrower’s home. It’s a can’t-miss proposition. Even if the economy goes South they can take and resell the collateral. The business is global: the Hong Kong & Shanghai Banking Corporation, now HSBC, wants to export it to the eighty-plus countries in which it has a retail presence. Institutional investors love the business model and investment banks securitize the loans. These fancy terms will be defined as we proceed. The root, however, the fodder on which the whole pyramid rests, is the solitary customer at what’s called the point of sale… points and fees can be added to the money that’s lent. CitiFinancial and Household Finance both suggest that insurance is needed. This they serve in a number of flavors — credit life and credit disability, credit unemployment and property insurance — but in almost all cases, it is included in the loans and interest is charged on it. It’s called "single premium" — instead of paying each month for coverage, you pay in advance with money on which you pay interest. If you choose to refinance, you will not get a refund. It is money down the drain, but at the point-of-sale it often goes unnoticed.
Take, for example, the purchase of furniture. A bedroom set might cost two thousand dollars. The sign says Easy Credit, sometimes spelled E-Z. The furniture man does not manage these accounts. For this he turns to CitiFinancial, to HFC or perhaps to Wells Fargo. While the Federal Reserve lends money to banks at below five percent, these bank-affiliates charge twenty or thirty or forty percent. You will have insurance on your furniture: to protect you, they say, from having it repossessed if you die or become unemployed. Before the debt is discharged, dead or alive, you will have paid more than the list-price of a luxury car or a crypt with a doorman.
Midway you’ll be approached with a sweet-sounding offer: if you’ll put up your home as collateral, your rate can be lowered and the term be extended. A twenty-year mortgage, fixed or adjustable. The rate will be high and the rules not disclosed. For example: if you satisfy the loan too quickly, you’ll be charged a pre-payment penalty. Or, you’ll pay slowly and then be asked to pay more, in what’s called a balloon. If you can’t, that’s okay: they knew you couldn’t. The goal is to refinance your loan and charge you yet more points and fees.
In prior centuries, this was called debt peonage. Today it is the fate of the so-called sub-prime serf. Fully twenty percent of American households are described as sub-prime. But half of the people who get sub-prime loans could have paid normal rates, according to Fannie Mae and Beltway authorities. Outside it’s the law of the jungle; the only rule is Buyer Beware. But this is easier for some people than others.
Why would a person overpay by so much? In the nation’s low-income neighborhoods, sometimes called ghettos or, in a more poetic euphemism, the inner city, there’s a lack of bank branches. In the late 20th century, many financial institutions left the ‘hood in the lurch. They refused to lend money; they refused to write insurance policies.
Speculative Onslaught. Crisis of the World Financial System:
The Financial Predators had a Ball Financial Tsunami, Part V
by F. William Engdahl