Sunday, May 01, 2011

Seventh Third Bank - a Parable

I would like to share what I see as a parable for today’s prevailing winds in the U.S. Corporations have “rights” similar to individuals as the U.S. Supreme Court tells us. We all can, of course, have complete “freedom” as long as what we seek doesn’t come into conflict with the influence of those more powerful than us. We live in a world of “smoke and mirrors”.

In some ways I am fortunate in approaching my 60th birthday. I probably will not live long enough to face the U.S. becoming a weak, ineffective country which is laughed at by people in countries such as India and China as well as most of Western Europe.

Perhaps more sadly, with all the supposed “Christian Good” around us, we rarely see true benevolence which considers true facts such as that with median household (gross) income of about $52000/year the “average” family could not possibly afford to pay the average cost of health insurance of approximately $13000/year or 25% of their gross income.

“Until May 19th you have an opportunity to effectively reduce your present mortgage interest rate from 5.375% to 4.4%.*” So stated the initial words of the sales pitch of our lender who I shall call (fictitious) “Seventh Fifth Bank” who are headquartered in a city I shall label (fictitious) Reds-Bengal-Land, USA.

If, dream, dream we could actually lower our interest rate as was implied above, our payments would be reduced $237.55/month and if we paid our loan for its remaining years we would save $82,669.13 in interest.

To explain “effectively reduce mortgage interest rate”, an example may clarify things. If one were to borrow: $100,000, for 30 years, at 12.0% interest one would agree to make 360 monthly payments of $1028.61 which would include $270,300.53 in interest . If one were to instead have made the loan for 15 years, one would agree to make 180 monthly payments of $1200.17 which would include $116,030.25 in interest.

Now, if one took out the 30 year loan (as described above), but paid $1200.17 each month (instead of $1028.61), assuming that there was no pre-paid interest penalty, one would pay the loan off in 15, rather than 30 years and “essentially save $154.27.28 in interest payments” as a result.

One could then argue that one had paid off a 30 year loan with $116,030.25 in interest (rather than $270.300.53) and thus had an “effective interest rate” of just under 6.01% (taking the total interest paid and calculating what interest rate would occur with a 30 year loan with that amount of interest paid). The Fact that one had in actuality effectively had a 12% 15 year loan would be “irrelevant”.
It is true than when I pay off a loan more quickly than its terms require, I will pay less interest (assuming non pre-paid interest penalty). This does not however lower the interest rate I am paying.

It is obvious that the Seventh Fifth Bank sends letters out to people like me in the hope of generating more business and making more money from us. In actuality there are small fees charged for their “service”. This “service” is an effort to make more profit for the Seventh Fifth Bank.

It is unfortunate that some people may read the promotion letters and believe the deceptive statements made by corporations such as Seventh Fifth Bank. They could be honest and advertise their offer as a means to pay off a loan more expeditiously and save interest paid. This would be true!

As correspondence from the Seventh Fifth Bank in response to my complaint to their state regulator makes clear, they know what they are doing and will continue to deceive their customers.

It’s “The American Way”! It makes me very proud to be an American!

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