Hardly anything could be nicer than to pick up your mail and find a check for $1,554.82 -- not one of those that say "You may be a winner," but the kind you can actually put in the bank.
With it you could pay off your creditors, take a vacation, get your tires rotated, join the health club. Possibilities abound.
But there are a few catches. The check is a loan. By endorsing it, you agree to pay back the money at a 24 percent interest rate. In total, during the next 36 months, you will pay an additional $641.18, besides the original $1,554.82.
Sending out such tempting checks is one way that consumer lending companies and other financial institutions are beating the bushes for more customers who are willing to borrow more.
Other enticements are preapproved credit card applications, checks that draw on credit card lines of credit, and the increasing of credit card limits. Then there are the ubiquitous automatic teller machines, ready 24 hours a day to dispense cash advances.
In the above example, the $1,554.82 check was sent out by Beneficial Corp., a national consumer finance company in Peapack, N.J. The marketing technique, which is also used by other companies, has been used for the last several years by Beneficial and has proven to be successful, according to Robert Wade, a spokesman for the company.
But Beneficial is selective about who gets the checks. Wade says the list is compiled from people who have been Beneficial customers in the past or who may have a credit card that Beneficial issues through various retailers. The credit histories of these people are then checked and rechecked, he says. "It is not in our interest to send the check to someone who could not service the loan," Wade says.
He defends the high interest rate, saying it is the rate that the company needs to charge to make a profit on relatively small, unsecured loans. Why send out the checks unsolicited? "There is a convenience there," Wade says.
The 24 percent rate is normally the highest rate that can be charged in Maryland on consumer loans of more than $2,000, according to J. Steven Lovejoy, the assistant attorney general assigned to the state commissioner of consumer credit.
Lenders are allowed to charge up to 33 percent on a small loan if it is under $2,000, Lovejoy says. But the rate applies only to the first $1,000 of principal and the 24 percent limit would apply to the second $1,000.
Much of consumer debt is generated by credit cards, which normally carry high interest rates ranging from 18 to 20 percent. These rates have resisted coming down even as other loan rates have declined steeply over the last year.
Consumers have been cutting back on debt in recent months and consumer installment credit outstanding dropped by 2.1 percent in August, according to preliminary figures from the Federal Reserve Bank. However, consumer installment debt -- which excludes mortgages -- still stands at $729 billion.
The aggressive marketing of credit proves hard for many customers to resist. "If people are in a jam, they feel that God has come through for them," says John F. Gengler, education director for the Consumer Credit Counseling Service of Maryland and Delaware, a debt counseling service. "In the wrong hands, it will put somebody deeper in debt," he says.
Many of those people who get in over their heads end up at the counseling service, which devises plans for repayment of debt. It has been a booming business. In the first six months of 1990, 5,243 people had appointments with the service. In the first half of this year, appointments increased 21 percent to 6,368.
The type of person who is having debt problems is also changing from the blue-collar worker to the professional white-collar worker -- much to the surprise of credit managers and lenders, Gengler says. "People are encountering difficulties without any warning," he says.
Companies are making credit more available partly in response to increased competition for fewer customers, Gengler says. This results from the lower birth rate after the baby boom generation.
But another reason is that consumers want it. "The consumer wants quick, fast, easy credit," Gengler says. "And the consumer gets what he wants."
However, the flip side to easy credit is high rates. The companies must charge the higher rates to make up for the increasing number of defaults.
Critics of credit card companies say there is another motive for the high rates -- to cover losses in the non-consumer parts of their business.
While companies are moving into consumer lending, the growth for the traditional consumer lending firms has been "very slow," according to David Penn, a bank analyst for Baltimore's Legg Mason Inc. brokerage.
Yet, consumer lending is the area of expansion for most banks victimized on other defaults. "They view the consumer as less cyclical than construction companies," Penn says. "Individuals tend to pay their bills."