Money Matters: Shame on you!

Question: Would you know some tricks in getting people to buy stuff even if they are not the things they need or even if they need them, the pricing is not right?—asked at “Ask a friend, ask Efren” free service available at www.personalfinance.ph and Facebook

Answer: Behavioral economists will say that when it comes to fighting consumerism, it is not about mind-setting.  After all, our minds have already been set (at least for the most part) since the time man first appeared on this planet.  That is why it is not about creating new “mind-sets” but rather creating simple rules to lead your brain to already set ways of thinking appropriate to particular situations.

The rules have to be simple. Otherwise, retailers who study human behavior will hit us when and where we are most vulnerable.  That is why I also say to such retailers, “Shame on you for taking advantage of people!”

Cavemen had to immediately kill animals that wander into their territory for fear that such animals may get away or be coveted by another tribe. The need to  consume immediately was a means for survival.  Through evolution, the need to consume has now been ingrained in human thinking that probably led to the development of the concept of time value of money where money consumed now is worth more than the same amount of money consumed in the future.

Immediate consumption, or what we, Filipinos, say “now na,” has spread to other things that are not considered necessities. Let’s apply this concept.

Wanting to buy the largest and latest television will set us back at least P30,000 given today’s prices.  What if we don’t have the cash?  We can borrow from institutions and pay the loan through installment.  But what if we don’t have the documents to evidence our repayment capability?  We can borrow from individuals.  But the easier the credit gets, the higher the interest rate will be. Why? To the lender, the absence of documentation presents higher risk. And the higher the risk, the higher must be the return or the interest rate on the loan.

While I agree to higher interest rates on personal loans, why on earth will you charge a person 172 percent per year? You might ask, “Who charges 172 percent per annum nowadays?”  Opportunistic lenders in the provinces still do.  If only people knew the true rate at which they were borrowing.  Unfortunately they will find it hard to do so. Why? Interest rates are not quoted on a per annum effective rate but on a monthly rate.  The 172 percent  p.a. rate for example is actually quoted at 10 percent a month on an add-on-rate or A-O-R.

Under A-O-R repaid on a monthly basis, the principal is divided by the term of the loan while the monthly interest rate is applied on the original principal all the time.  Thus, a 172-percent p.a. rate can be presented as a small 10 percent per month rate. Shame on you!

How can we get hooked on a 10-percent per month rate?  Behavioral economists will say that loss aversion is also ingrained in the brain.  Loss aversion is necessary for survival.  So how can a 10-percent a month interest avoid losses? That is because the alternative is 5-6, which is higher at 20 percent. And do not forget the consumeristic pull of “now na.”

But even 5-6 is not effectively 20 percent because collection is done daily.  Given a P30,000 loan repaid at P900 a day for 40 days, the effective interest is a whopping 332 percent p.a.  Shame on you!

If you want to know the true interest rates on loans, use Ya!man™,  the country’s first free personal finance mobile app available from Google Play and iTunes.

What about those lending institutions who say that you can only prepay your consumer loan balance with a penalty rate?  Article 137 of the Consumer Act (R.A. 7394) stipulates that “the person to whom credit is extended may prepay in full or in part, at any time without penalty, the unpaid balance of any consumer credit transactions.” This provision is echoed by no less than the Bangko Sentral ng Pilipinas. But some lending institutions still apply charges on prepayment because they term the charges as processing fees. Shame on you! And please note that the law specifies prepayment at any time (not on anniversary date).

To know more about retailers’ tricks and the simple rules to fight them with, please visit www.personalfinance.ph.  You can also attend our EnRich™ Wealth Creation and Preservation training or our Financial Planner’s Training program for the cities of Mandaluyong, Zamboanga, Baguio, Iloilo, Davao, Cagayan de Oro, Ormoc, and Cebu. Check our website for the details.

(Efren Ll. Cruz is a registered financial planner of RFP Philippines, personal finance coach, seasoned investment adviser and bestselling author. Questions about the article may be sent by SMS to 0917-505-0709 or e-mail to [email protected]. To learn more about personal financial planning attend free personal finance talk on Sept. 17 7p.m. at PSE Center. For more details, inquire at [email protected] or text <name><email><RFP> at 0917-9689774.)