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.
When 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:
"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 Credit.com -- 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 Credit.com. "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 Credit.com and does not necessarily represent the views of the company or its affiliates.
More from Credit.com
- Why you should check your credit score before buying a home
- How to improve your credit score
- I want to get my credit score for free
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.
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.
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