If you live in Virginia or in the District of Columbia, you may not have seen the article about interest rates that staff writer Leon Wynter wrote for our Maryland Weekly on Thursday of last week.
Leon reported on a study made by the Consumer Protection Division of the Maryland attorney general's office. The study examined the rates that Maryland banks charge for home improvement, auto, credit card and unsecured personal loans. The findings probably shocked many readers.
For example, while one bank charges 18 percent on auto loans, a neighboring bank charges 14 percent. At 18 percent, $5,000 costs $900 a year, but at 14 percent it costs only $700 year. On larger sums, the amount that can be saved by "shopping around" becomes even greater.
Maryland's Consumer Protection Division should be applauded for making public the names of banks and the rates they charge. This country lives on credit. Our economy couldn't function without it. Yet the average borrower knows too little about economics, banking, borrowing or prevailing market conditions.
A housewife with no financial training knows that when she goes to the grocery store she must examine prices carefully and compare them to prices available elsewhere. The pennies she saves add up to many dollars.
Imagine what the savings can be for one who shops carefully for a loan.
One must also shop carefully to find the best terms on interest-bearing checking accounts. There are vast differences among them.
For example: Some banks require a minimum daily balance before interest can be paid and service charges avoided. Other banks require only an average minimum daily balance.
Is that a significant difference? You bet your sweet life it is.
In the first instance, if you kept an average of $5,000 in your checking account on 29 days of the month and your balance fell for one day to $1,499, you would lose interest for the whole month, incur a service charge, or both, depending on your bank's terms. In effect, for the privilege of being able to write checks, you would be lending your bank money at 5 1/4 percent and your bank would be lending out your money at from 14 to 24 percent. Yet in any month in which your loan to the bank fell to $1,499 or less for even one day, you would be penalized.
Onthe other hand, you could shop around until you found a bank that would pay you the same 5 1/4 percent interest (and no service charge) for maintaining only an average daily balance of some stipulated amount. This means that even if your balance fell below the norm on one or more days, a higher balance on other days of the month could still bring it up to the required average.
What a whale of difference that makes, especially when the "required amount" in this area varies from virtually nothing (especially for those over the age of 60) to $2,000. My own NOW account is with a bank that gives me full benefits so long as my average balance is $1,000. I'm sure that if you shop carefully you can do as well or better.
We in the news media may not have done as much as we could have to focus attention on consumer economics. For the most part, writers and braodcasters who deal with the subject don't teach. They just report.
Apparently they assume they are writing for a sophisticated audience that doesn't need explanations, but I have my doubts about that. Thousands of people who have saved some money and want to invest it wisely terms as book value, pay value, fully diluted earnings, debenture, secondary offering or rights. Many investors don't know a red herring from a March belly future.
It's true that reporters seldom mention the prime rate without explaining that "this is the rate charged by banks to their largest and most creditworthy customers." But the truth is that banks lend money to ditchdiggers at 14 percent at a time when they charge General Motors or AT&T a prime rate that is 50 percent higher. Nobody explains why banks do this.
When I put the question to Leon Wynter, who was a loan officer for a bank before he became a reporter, I was given a sensible answer plus an interesting dissertation on other banking practices.
I hope that in the days ahead Leon will write more articles about banking and economics. He's a good teacher.