Should you have to pass a test to get a loan?

You've got to ace a driving test before you get your license. Some think a financial literacy test would help prevent financial crashes.

By May 19, 2014 1:55PM
This post comes from Christine DiGangi at partner site on MSN MoneyWhen I was a teenager, I couldn't wait to start driving a car. My first experience behind the wheel started with a series of questions, delivered by my dad, and one of them stood out:

Office worker sitting in the corner, wearing dunce hat © Design Pics/Corbis"What are we sitting in?" he said.

"Um, a minivan?"

"Wrong. This is a lethal weapon." Well, that's not what I expected to hear, I thought, terrified. He continued: "If you're not paying attention while driving, you could kill someone. Do you understand that?"

I nodded. I hadn't even put the key in the ignition yet.

As my father so bluntly explained, driving a car can have potentially grave consequences. In the 20th century, the booming popularity of automobiles in the U.S. prompted some cities and states to test and issue licenses to motorists. It was an an attempt to keep incompetent drivers off the road, and while reckless driving hasn't disappeared, at least people have to exhibit some understanding of car functionality and traffic laws to operate a vehicle.

Writer John Aziz recently made the argument that the same should be true for people applying for a mortgage:  "People wanting to take out a mortgage or get a credit card or a loan would face compulsory basic finance literacy testing," he suggested in an article in The Week.

He made a good point. A mortgage is a huge responsibility, and it's not just a personal one. As the financial crisis showed, irresponsible borrowing and lending can have far-reaching consequences that ripple out into larger parts of the economy. Perhaps a competency test wouldn't be such a bad thing.

The credit basics

After the housing collapse and economic recession, the government imposed more regulations on mortgage lenders, including the need to verify a mortgage applicant's ability to repay the loan. Your credit history plays a huge part in the mortgage approval process, so in a way, the borrowing process already has a test: the credit score.

Credit history isn't not the only factor, but you'll have trouble getting a loan without a good one. When you're applying for any kind of credit, you should have an idea of what your credit standing is -- you can get two scores free through -- because poor credit could mean loan denial or high interest rates. The more you know about your credit standing, the better your chances are for improving it.

"The standards are pretty high," said Gerri Detweiler, director of consumer education for "You really have to prove yourself, not just with your credit score, but back up everything with documentation."

At the same time, being able to afford the loan isn't the same as understanding it. It's up to consumers to understand what they're getting into, Detweiler said, and homebuyer classes can be very helpful in that process. They're not a requirement, though.

In his article, Aziz talked about financial literacy issues in the U.S. but says efforts to increase education haven't worked. He floated the idea of putting something at stake to make the lessons stick.

"You can't get a mortgage unless you can demonstrate you understand how interest payments, inflation, and other basic financial concepts work," he wrote. If access to financial services depended on financial literacy, financial literacy rates would shoot up."

Who needs it most?

Studying for your mortgage may not sound appealing, but if it could help, perhaps it's worth exploring. Of course, irresponsible borrowers won't be barred from taking out loans, because passing a test doesn't necessarily reflect understanding.

If we're talking about people who really need financial education before taking out student loans, perhaps we should look at education itself. Student loans are easy to get, and plenty of Americans have student loan payments that exceed their mortgage or rent payments. You're going to have a tough time trying to get out of a student loan, too, because student loans can't be discharged in bankruptcy.

There isn't a simple solution to economic problems spurred by financially illiterate consumers. The best lesson is usually experience, but foreclosure shouldn't be the way you come to understand the gravity of a mortgage. It isn't perfect, but I'm glad we have to take driving tests. Otherwise, we'd just have people getting in cars, telling themselves, "I'll be fine, as long as I don't hit anything."

If only it were that easy.

This story is an Op/Ed contribution to and does not necessarily represent the views of the company or its affiliates.

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May 19, 2014 2:42PM
 "Of course, irresponsible borrowers won't be barred from taking out loans", no kidding? Irresponsible parents won't be barred from having (multiple)  kids they can't support, and we as a society allow conjugal visits in some  prisons to make more, even people who file bankruptcy are often second (or third) offenders - (Donald Trump - 4 bankruptcies), there are people with their license revoked that still get behind the wheel. Its not so much financial literacy as personal responsibility, in all areas, and the responsible people are the ones picking up the tab, the pieces, the wreckage, and the ripple effects thereof
May 19, 2014 3:21PM

 What about drug and financial literacy tests for our politicians and bankers? Lots of laws for us all too have to follow, along with a separate set of loose rules for the wealthy to ignore. Weather it's Bush or Obama, we'll still be screwed by the excessively greedy. Unfortunately our middle class is dead and now we are all destined to be treated like ignorant children. Who's only real outlet for change is a small whimper of frustration at the bottom of a website article's comment section.

May 19, 2014 3:55PM
It's not always a question of not understanding what a loan is that makes a difference; it's that people are being raised that there are no consequences.  Get a loan, go bankrupt.  Buy a house you can't afford, the government bails you out and blames the lenders or you get to get to offer it as a short sale, and the only loser if the lender.   Don't want to pay, just walk away.   Nobody loses anything anymore.  The only loser is the taxpayers.  You hear on the news every night the next sob story of some guy who professes to have been cheated.  Cheated because you didn't read your paperwork?  I don't udnerstand how people feel sorry for people who buy things they can't afford and then blame the banks for giving credit cards to people who use them going out to dinner every night.  YOU KNOW when you make those charges that you are going to have to pay for it.  Taking a test is not going to solve that problem.
May 19, 2014 4:17PM
A lot of young people nowadays, have been raised as the entitlement generation. A lot of the fault falls on the Baby Boomer Generation. Yes, I said it. We gave more to our kids than our parents gave to some of us. But, a lot of us were more responsible, also. I know some parents in my generation who gave everything to their kids who got on dope and had to pay fines for their crimes they committed or went out and borrowed money and used credit cards like there is no tomorrow and expect their parents to bail them out of their big mess. Absolutely irresponsible and think they are entitled to everything. I have seen that happen a lot. I know one parent whose son lived at home until his mid 30's, he got married to a dope head and was on dope himself and went to jail on theft charges a few times and she bailed him out a few times. Then after he got out of jail, she paid for a place for him to stay and then later he went back to his estranged wife and to his old ways. She has another child age 23, who lives at home and does not work nor goes to school and pays her car note. She has no responsibilities at all whatsoever. Yet, she wonders why her kids are the way they are......Like duh!! Helloooo!!
May 19, 2014 5:02PM
The 1st home loan I pre-qualified for back in ~'96 left me stunned. They wanted to give me the universe! It would have left me less than $500/mo to live on. How many idiots fall into this trap? A lot, I'm guessing, with the 'I want it all and I want it now' mentality that now prevails.
May 19, 2014 7:06PM
That would be a step up from 2008 when you didn't even need a job to buy a house.
May 19, 2014 11:47PM
"He made a good point. A mortgage is a huge responsibility, and it's not just a personal one. As the financial crisis showed, irresponsible borrowing and lending can have far-reaching consequences that ripple out into larger parts of the economy. Perhaps a competency test wouldn't be such a bad thing."

Not really since neither He nor YOU have a stinking Clue to what really happened then or now. So some morons actually think some bogus financial literacy test would help prevent Global financial crashes. I hate to burst your Bubble but some Freaking financial test isn't going to stop Corruption and Greed at that Level. Jail time however will. Maybe we need a morality test first.

When Enron engaged in Cooking their Books, don't you think they Knew exactly what they were doing. When Too Big to Fail and Too Big to Jail Banks cooked up Scam Derivatives, don't you think they knew exactly what they were doing. At least in the Enron Case, at least some folks went to Jail. Big Banks have just been paying off folks to keep things Quiet.

Financial literacy should be taught at school and at home. However, just because folks understand what something is hardly means they will do the right thing. Too Big to Jail and Too Big to Fail Scam Banks have proven that beyond a Shadow of a Doubt. But sure, go ahead and float this notion that making sure the Average Joe knows better will prevent the never ending Bigger and Bigger Bubbles. Go ahead and behave as if this will stop Corporations from Cooking the Books while taking stupid Risks regardless of their Master's and or Ph.D Degrees.

This Flawed and misleading thought process that the Average Joe/Sue were the Trigger for a given Financial Crisis like the Great Recession is a total Myth. A Myth created by Too Big to Fail and Too Big to Jail Bankers and their Pawns. The Elite made out like Bandits while everyone else was left holding the Bill. But sure, buy into the BS propaganda that Articles like this are trying to Push out as Fact.
May 19, 2014 3:14PM
You do to get a student loan from the government.
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