Yes, if you want to borrow money, the person loaning you money is generally going to insist that you opt into the system that helps them understand if you are a good credit risk or not.
That's not an unfair request on their part.
Don't want to participate? Then don't ask for a loan.
> Yes, if you want to borrow money, the person loaning you money is generally going to insist that you opt into the system that helps them understand if you are a good credit risk or not.
That's not really what they care about. They don't even get to choose whether you previously borrowed money only from people who agreed not to report anything to Equifax et al.
What they really want is to be able to inform on you to their competitors as leverage in getting you to do what they want, like pay false charges instead of disputing them because then you refusing to pay them allows them to ding your credit score. Which in turn raises the interest rates on all your existing variable rate debt and can put your whole life into a downward spiral.
Whereas without it, lenders would be more wary to lend money, but that would be true universally. So the result would be that things like housing and education would be more affordable because it wouldn't be so easy for everyone to borrow money and bid up the prices, and people wouldn't be paying such a high percentage of their salary for loan interest.
Which leads to the conclusion that the whole system is corrosive and we would be better off without it.
> Don't want to participate? Then don't ask for a loan.
It's a collective action problem. Everyone is better off if nobody takes a loan to buy a house and then the same people get the same houses but everybody pays less, but if you refuse the loan and the competing buyer doesn't, who gets the house?
Existing land owners, home builders, and mortgage lenders are most certainly not better off if people only buy houses with cash.
I also think that whatever the lowest rung on the economic ladder who could plausibly buy property may also be made less well off by shutting them out of the housing ownership market entirely.
> Existing land owners, home builders, and mortgage lenders are most certainly not better off if people only buy houses with cash.
The existing land owners are probably the biggest real opposition now, though they wouldn't be any worse off if we had done the right thing to begin with, because then they'd have paid less from the start too. It could be worth a one-time cost of paying them off in some way.
It's debatable whether the home builders would actually be worse off, because most of what people are really bidding up is the land, since construction has a lot more supply elasticity than land. They may even get more work in the long term as people aren't paying loan interest as much, so they ultimately end up with more money that can be used for home improvement projects.
And I don't think people have a lot of sympathy for the plight of the mortgage lenders.
> I also think that whatever the lowest rung on the economic ladder who could plausibly buy property may also be made less well off by shutting them out of the housing ownership market entirely.
Why would it do that? There would still be the same amount of land, so approximately the same people would have it. If it costs less by the same amount as the credit which is no longer available, the main difference is the interest you're no longer paying to the bank. If anything that should benefit people at the bottom of the ladder, who would have had to take loans with higher than average interest rates.
People who are buying houses with 3% down payments are unlikely to be able to buy a house for cash for 3% of current prices. That's the sense in which they may be shut out of home ownership.
One of the most consistent and reliable means to lift oneself from the low end of middle class to squarely middle class has been the leveraged purchasing of property in a city that continues to grow. Taking a 3% or 5% downpayment and having housing appreciate at inflation or slightly higher than inflation is a tremendous wealth creator when that equity is created with leverage.
People buying houses with 3% down payments are generally paying such high interest rates that they don't get to enjoy the home price appreciation because they're paying it all in interest to the bank. Meanwhile they're taking the risk that the house doesn't appreciate faster than inflation, or at all, as was the case for people who bought homes in cities like Detroit. And the bank will want enough interest to cover the risk that the home value declines and they default on the loan, which means many such people are paying more to own than they would to rent, even after including the accumulation of equity.
Homes appreciating faster than inflation is also an unsustainable trend in general. The result has been for housing costs in those areas to increase as a percent of wages, which obviously can't continue indefinitely because the result would be housing costs that don't leave enough for other necessities like food, or that exceed wages outright.
It's true prices probably wouldn't fall to only 3% of what they are now and so the same people couldn't purchase the same house immediately, but rents would fall along with housing costs. The combination of lower housing costs and less paid in interest on huge high-risk loans would allow the same people to own the same house outright in less time, even if it meant renting it for some period of time first. And of course the money they intend to use to buy the house could in the be earning interest before they reach the threshold to buy the house without a loan, which (if the efficient market hypothesis is correct) would give the same risk-adjusted returns in the meantime as investing the same amount in home ownership.
Houses don't have to appreciate at higher than inflation in order for them to create wealth; they just have been in many areas due to the overall economic expansion. They can appreciate more slowly than inflation and the effect of leverage can still give them cash-on-cash returns higher than inflation or alternative investments.
On a conventional mortgage with 20% down, if the house appreciates at 1% per year in a 2% per year inflation environment, a $100K house goes up by $1K each year. Someone who bought that house with $20K down sees a $1K gain on their $20K cash investment, for a 5% cash on cash return. They also have a place to live typically substantially cheaper than they were paying in rent. Obviously, where they increase even faster than inflation, this is wildly beneficial and if they decline much at all, it's terrible.
3% down mortgages seem to cost around 1.25% more than 20% down mortgages. It's about 1/8-1/4% on the base interest rate and 0.5%-1% for PMI. With a base interest rate on a 30-fixed around 4%, paying 5.25% on a 3% down mortgage is still a good deal IMO.
If landlords had to pay cash for rental properties, I'm not convinced that you'd see such a surplus of rental properties such that it would drive rents down significantly. Rents are driven by ability and willingness to pay. Many small landlords would be forced out of the supplying housing to others work. If landlords could borrow money to buy houses but owner occupants couldn't, I think you'd see a massive defection of the housing economy in favor of landlords.
Obviously, anyone could borrow on unsecured terms. It seems likely that medium and large landlords could exploit that (borrowing against the projected cash flows, but without using real estate as collateral for the loans) and that would also result in a large shift of power away from owner-occupants and small landlords.
> Don't want to participate? Then don't ask for a loan.
This is not pragmatic advice. I needed to take out loans to go to college. My phone company did a credit check before they'd let me sign up for a plan. So did my landlord before they offered me a lease. When I buy a car or apply for a mortgage on a house, they'll also check my credit.
This system is deeply ingrained in our society; there's not really a way to opt out and still have a relatively normal life.
> This system is deeply ingrained in our society; there's not really a way to opt out and still have a relatively normal life.
And this is what needs to change. I’ve known many successful people that moved to the US and then had problems getting services because they had no “credit history”.
Translation: Don't participate in the economy unless you're independently wealthy.
Conveniently left out: Don't ever apply to rent a house or an apartment. Instead, buy a home. In cash, of course, because you're independently wealthy.
Oh, and also: Don't apply for a job. Because, you know, independently wealthy and all that.
The idea that non-participation in the credit racket is anything but an exercise in extreme economic privilege is laughable.
Er... this is exactly how it works in developing / third-world countries.
My parents managed to obtain a loan for their first apartment thanks to my grandparents offering their house as colllateral. This is how pretty much everyone from my parents' generation got their first apartment.
Credit pretty much didn't exist in my parents' generation - loans were generally reserved for houses and cars, because of the strict conditions. Everyone saved up lump sums and paid cash. It's ineffficient, but far from "not participating in the economy".
It may be possible to negotiate different conditions on receiving credit, but I don't know if you can demand a modern economy without any drawbacks.
It's difficult to participate in an economy like the US where the prices of home purchases (and, by extension, rents), are driven up by competing buyers who have access to copious amounts of cheap credit.
That is hardly relevant to this discussion about modern United States economy and society. Your story even involves needing grandparents who own property to use as collateral.
I think it's a good argument that you shouldn't need to do this but like everyone my age got their first car loan and apartment with their parents cosigning. It's super relevant to the the US economy today.
It's possible to get credit without someone else but you'll get an absolutely terrible interest rate -- if you have someone in your life with good credit that trusts you (like family) you're leaving money on the table by not 'borrowing' their good credit.
We're told from an early age that we need to be college educated to be economically viable in the world of today and tomorrow. This may or may not be true, but public schools put a non-trivial amount of effort into convincing us it is. Most of us need loans to go to college. To me, this feels like a form of coercion to enter the credit system, either by way of economic realities, or heavy marketing to young people who are not equipped to defend against it.
What's unfair is the pretense that this is a market transaction between two equal parties. The "person" loaning the money is quite frequently a large corporation with access to resources allowing them to leverage the credit bureau system and the legal system to achieve an outcome in their favor. Most consumer borrowers don't have the resources to retain counsel or sue.
Don't want to participate? Then don't ask for a loan.
The Bible tells us that Jesus drove the money-lenders out of the temple. Which means that loans predate credit reference agencies by thousands of years. Therefore we have historical record that they are superfluous.
Actually it was money changers not lenders. The temple in Jerusalem had its own currency separate from the local and Roman currencies and all purchases around the temple required its use. It was essentially a a mix of extortion and racketeering, where if the people wanted to fallow their religion and fulfil their religious obligations they had to buy sacrifices (sheep, oxen or doves depending) from the temple in temple money which had a horrible exchange rate. Technically the people could bring their own but if they did that it had to be inspected approved to be healthy clean etc, and if it didn't meet standards it could not be used as a sacrifice. However The temple would buy it off at a cut rate as it has obviously inferior...
A genuine alternative is to be able take your custom to one of the MANY other providers who aren't forcing you agree to conditions that are ridiculous. As soon as there is no alternative it's an industry cartel and we need to look at regulating. What is appropriate to determine credit worthiness? How about a blood sample? How much melanin do you have? Who did you vote for and we'll need that verified with a photo of your ballot. There's a million more totally unreasonable ways of determining your credit worthiness, some legal, some not but should be and you would choose not to submit if you could.
You have agree to pay interest, on time and pay the loan back. -- ok that's not something you can reasonably opt out of and hope to get a loan.
You have to agree to to have your life ruined on a whim or by incompetence because you borrowed $1k and paid it back in full with the interest? -- no, definitely not ok.
In between the extremes are all the cases that need looking at. This is a standard case of market failure where you as a consumer have zero market power to effect your preference and your preference is more than reasonable. The GFC was one occasion where such a market failure really came home to roost. There are others, some are trivial, some are huge, most in between. Where it can ruin your life, utterly needlessly and the lives of others, possibly systemically across the whole economy, we tend to want to regulate it so that doesn't happen. There are many such examples in finance which is why we have regulated it in so many ways for so long. Sometimes the regulation will be effective, sometimes not, sometimes it will be fair, sometimes not, sometimes it will be captured by the powerful, hopefully mostly not. Without it, eh, we head for some big trouble, at worst class and civil warfare.
(Separate but somewhat related note: "You need to agree to all future changes to this contract by your counter-party in all circumstances" - OH HELL NO that's not ok and should not be considered remotely legal, yet there it is in every single click through you've ever bothered to read and fail to understand on the internet because the click throughs (not contracts for mine) are simply not capable of being understood without the assistance of layers of courts, lawyers and judges - the law on them is not settled anywhere on earth as far as I'm aware. Unconscionable conduct in such things is the norm, pretending otherwise is silly no matter how libertarian I want to be about it and life in general.)
no, not all things that are wacky are disallowed and that's the point. I chose examples that are hard to disagree with to show why regulation is already used and is necessary in the presence of market failure. This is market failure, clearly.
You can't take your business elsewhere if you don't like the provisions on account of the fact that they ARE wacky. You can't renegotiate wacky contract provisions. Market failure.
That's not an unfair request on their part.
Don't want to participate? Then don't ask for a loan.