While this particular example applies largely to the poor, you could write a similar article about the vast majority of Americans.
How about "Why engineers in the Bay Area pay 1 million for a 600k condo" or "Why smart people pay 400k for a 150k education."
Fundamentally, the high price of the couch is really a reflection of the risk made in the "loan." Americans are too leveraged and don't save enough across the board. If credit were harder to come by, and the majority of loans were made with the expectation that the borrow would actually pay off the loan, you wouldn't end up with 4k couches. Also, I would imagine the apparent need to keep up with the Joneses would be diminished because fewer people would be driving the proverbial rent-to-own Mercedes.
Non-poor people don't pay nearly as much interest as poor people, and as such, generally wouldn't even pay $4,150 for a $1,500 sofa even if they did decide to take out a loan to pay for it.
That's actually kind of the point of the whole article - that poor folks are unlike other people in that they have no way of mitigating their risk in the form of lump payments to creditors.
The difference between the two examples you cited and the one from the article is that both condos and education are investments that are likely to have a positive ROI, whereas renting a couch and taking on debt for other day-to-day necessities will not.
You know, I hate to sound elitist or conceited or whatever word you may want to use to describe the following statement, but it's true: there is a huge element to these decisions that goes beyond education and background. At the end of the day, it boils down to plain old reasoning ability.
I have a friend who is pretty well educated in a non stem field and is decently successful (lower middle class).
We both drive the same car that is currently worth 9k (a car which he shouldn't have gotten either, but I digress).
We spent an hour the other day debating why he shouldn't buy a brand new 22k car that will save him 900 per year on gas.
For the life of me I just couldn't get him to see why the best decision financially was to drive his current car into the ground.
His argument was literally, in 10 years my new car will be worth more than yours. I was dumbfounded - I could not get him to see that it was coming at a cost of an additional 13k up front. He said it in a "haha got you! - you forgot about that!" kind of way.
I just gave up.
At what point do we just admit that no matter the education level, no matter the background, some actors in the economy just won't make the most prudent choice?
Are you sure the best decision financially is to drive the current car into the ground? We don't have enough context toy make an informed decision. But saving 1000+ a year in gas (that continues to go up) to have a brand new, relatively maintenance free car for the next several years isn't necessarily a horrible decision
It is incredibly difficult to beat the "drive it in to the ground" strategy on a strict fiscal basis alone. Even a $22k car will come with a ~$400/month car payment. That's $4,800/year in car repairs; which is a lot of repairs. That's almost 1370 gallons of gas (at around ~$3.50/gallon). You can drive 34,250 miles on that amount of gas if your current car averages around 25 MPG (not hard if you already own a compact car). It really only starts making sense when the older car requires so many repairs that it becomes unreliable. At that point, it starts making you late to work, or causes inconveniences that are untenable.
There are lots of reasons to buy a new car. I drive a new car every three years, so I lease. Fiscally, the decision to drive a new car every three years is about the worst decision you can make. I make that decision in the light of day though. I'm able to afford it, and we still maintain a household savings rate of 30%. Yes, I could increase that savings percentage even more by paying cash for a car and driving it in to the ground, but I choose not to. I choose the luxury of a new car in spite of its fiscal downsides.
Correlated, sure. But you can easily argue that it's as simple as people with higher cognitive ability can figure out ways to increase their income level better than others.
Or you could argue, education is correlated with higher income, so educate people, increase their income, and hope that their abilities go up as well.
Not sure if we're disagreeing or agreeing here, but all I am saying the problem isn't always as easy as, let's just give poor people more money and education. Problem solved.
At some point we'll have to recognized these difference in people, but it's embedded deeply in our culture that everyone is created equal. Which to be honest, I love.
I wonder if we just need words/abstractions that narrowly identify some of these things.
So if we could very quickly call something an attack on in-out group psychology (you know, like aggressive branding, or professional sports, or so called amateur sports, or much of political discourse or ...), maybe it makes it easier to sway people to resist it.
I guess if you figure out the right package, you do better than when you wave your hands around and mumble incoherently.
For financing, a first step is to point out that the real cost is often hidden in the length of the contract.
We do more good for more people when our beliefs reflect reality, rather than what we wish were true. If it turns out that the cognitive science research showing that some people are smarter than others is correct we might decide that merely educating poor people will not convince them to act like less-poor people.
I think all the people comparing this to buying house are kind of off base (though maybe less so in the Bay Area).
In most of the USA housing is a choice between spending $500 to $1500 a month and building equity or spending the same amount while not building equity. Obviously building equity is typically better even at a loss than spending the same amount for nothing assuming you don't plan to move frequently, etc.
This is in no way, shape, or form comparable to a couch. A shelter must be had. A couch is 100% a luxury, and there are loads of substitute goods, like bean bag chairs, or just plain cushions on the floor. Not to mention that all of them are mostly worthless used (unlike a house).
This is somewhat similar to how nearly all of the middle-class buy houses... by the time they finish paying off their mortgage they've spent twice as much as the original list price.
At least with homes, there is a chance for property to increase in value.
The home itself is fundamentally a depreciating asset as well. I think theres a reasonable argument to be made that the perception of real estate as an asset with increasing value is largely inflated by 30 years of increased leverage, decreasing interest rates, longer loan terms and decreased lending standards. Back in the 1950s, the average loan-to-value on a home was about 50%. Somehow it has since become standard to leverage yourself 5:1 on a home purchase, which for any other asset class would be kind of nuts!
> by the time they finish paying off their mortgage they've spent twice as much as the original list price.
Mortgages are the cheapest loans available to the public, so I don't see much of an alternative.
Most folk will never be able to save enough to buy outright with 'cash', since they would have to pay to live somewhere whilst saving. Essentially that's lost money.
This may sound offensive, but is buying a $1500 sofa really a good decision if you're "poor"? I don't consider myself poor, and I bought a $500 sofa, it's pretty nice and has worked well for many years. I also have a lot of good used furniture that I've bought for almost nothing off Craigslist.
I don't understand how it's really "financially ignorant" to pay high interest rates for the benefit of deferring costs over time? If your credit isn't great, it takes a long damn time to repair. These rental outfits both help rebuild that credit and provide a valuable service, imo.
Agreed. Seriously, poor people should be dumpster diving or cruising garage sales for furniture, not buying new. This is just people being stupid with what little money they have, and they get little or no sympathy from me. This is true even though, in general, I support a much stronger safety net and tighter regulation on predatory financial practices like payday loans. The vital difference is between necessity and luxury, and by ignoring that distinction this article is a lovely straw-man argument for mercenary conservatives to latch on to.
Almost all loans that don't feed into some sort of income producing activity are bad loans.
I would really like to know what happened to the idea of saving. I'm sure I'm going to sound like some old codger (OK, I'm almost 50, I am) but my first 10+ years out of university I had secondhand furniture and the cheapest bookcases I could find, and I was a network manager.
My parents taught me not to buy things I couldn't afford to pay in full immediately, because loans cost you. With the exception of my house, I have never taken out a loan. I pay my CC in full every month. Why do poor people feel they must have new, quality furnishings? I can see the rare splurge on something nice, but it seems everyone has to have all sorts of nice stuff regardless of whether they can afford it or not. Craigslist makes it ridiculously easy to find affordable furniture.
I think that headline is misleading. In the article, they say it was $1500 for a sofa and loveseat, which isn't bad if the material and construction is high quality (who knows, Ashley Furniture is probably crap next to actual craftsmanship).
The truth is, almost everybody ends up financing something and paying a lot more for it in the end than the sticker price. The trick is figuring out how to either avoid financing if possible, or minimizing the extra that you pay when you have to.
Even when you aren't explicitly financing something, people throw away huge sums of money all the time when there are cheaper alternatives. For example, how many of us pay rent for housing?
For non-optional things like shelter, this is harder to navigate. What makes people scratch their heads about a sofa is that strictly speaking, you can get by without a sofa. It's an optional purchase. It sucks not to have one, but there's no "sofa" in Maslow's Hierarchy of needs. My parents in law come from a culture where sitting furniture is a completely optional item for example (Korea) and most people sit and sleep on the floor perfectly fine.
I remember when I was first married, my wife and I were really desperately poor, for at least a year we didn't have any furniture at all. Even after we stopped being poor I don't think we bought a sofa for the first 4-5 years of our marriage and then it was a triple discount coupon holiday sale sofa. 10 years later we still have that sofa and have no plans to get rid of it any time soon.
Money's great, it can almost instantly eliminate all sorts of inconveniences, and easy access to more money than you can effectively manage is a real problem. Even relatively smart people, given absolutely free money (like lottery winners) don't know how to deal with it.
I was raised in a family of four with an anual income around $14,000 a year. Today, I'm an engineer with a base salary in the six figures. I can tell you first hand, wealth gives you not just the ability to do more but the ability to make the money you do have go further.
It's not the $4,000 sofas that strain poor people to the financial limit. It's the hot water heater you have to put on a credit card instead of paying cash. It's the groceries you pay twice as much for because you can't afford them in bulk. It's the overdraft fees that make a $100 mistake into a $500 one. It's the nickle and dime medical bills because you can't afford to address the root cause of an affliction.
This should really be titled "why the financially ignorant pay $4,150 for a $1,500" - you see this lack of financial smarts pretty much across the wealth spectrum from sofas to McMansions.
I think there's a difference between charging 30-40% APR (double what a crappy bank charges for a credit card, approx) and charging 4000% APR like Wonga.
Also note we're talking about different but related businesses - ludicrously overcharging for payday loans is one thing, ludicrously overcharging for hire-purchase is another. The second is less risky, assuming people don't trash their own furniture/possessions.
Finally, no, I am not certain an ethical payday loans business can exist, but I am certain an ethical loans business can exist. It's all a matter of gradually finding a limit, where people stop ranting about how unethical it is.
(to clarify - I am not actually a populist ethicist, I was merely speaking in practical terms.)
That statement assumes interest rates are irrelevant. Sure, if you have a 4% interest rate (the going rate these days), you'll pay 72% more than the value of your house, but that completely ignores the time value of money. A 4% interest rate is pretty great (especially when it's tax deductible!), and just saying that because the undiscounted cash flows that you spend are greater than the initial value of the house means very little.
No. Nobody on here would take a loan on a house with "effective annual interest rates of more than 100 percent" as mentioned in the article. It's true that people spend much more on a house than if they bought it outright, but they do so at interest rates low enough to where it makes financial sense because the expected return from investing the rest in a low cost index fund beats out the loan interest.
Not that this makes it much better, but the house at least has a chance of not being a depreciating asset. The $1500 sofa is worth $800 the day after it's delivered.
This reminds of HBO comedian John Oliver talking about payday loans.
I kept thinking about this and got very emotional over it. So I came up with a quote: Wealth is a beauty nurtured in savings so keep the choices you make on how much you use limited to your priority needs.
I wish the government or charities helped these people out by educating them about the various ways they can be frugal and the typical ways they get fleeced by holding free seminars and giving out flyers/books.
Perhaps the tips in Reddit's /r/frugal can be made into a book and freely distributed to such people?
There's an immense amount of money being spent on such folks, much of it from taxpayer dollars and it still isn't very effective at lifting them from the vicious cycle of poverty.
Most of the governments have financial education programs in place. They just don't seem to be that effective. My guess is that the answer to this has to come from the private sector. A company that somehow creates the incentives for these people to save instead of borrowing.
How about "Why engineers in the Bay Area pay 1 million for a 600k condo" or "Why smart people pay 400k for a 150k education."
Fundamentally, the high price of the couch is really a reflection of the risk made in the "loan." Americans are too leveraged and don't save enough across the board. If credit were harder to come by, and the majority of loans were made with the expectation that the borrow would actually pay off the loan, you wouldn't end up with 4k couches. Also, I would imagine the apparent need to keep up with the Joneses would be diminished because fewer people would be driving the proverbial rent-to-own Mercedes.