Question

In: Finance

Ethical Dilemma. Fritz and Helga work for a local manufacturing company. Since their marriage five years...

Ethical Dilemma. Fritz and Helga work for a local manufacturing company. Since their marriage five years ago, they have been working extensive overtime, including Sundays and holidays. Fritz and Helga have established a lifestyle based on their overtime earnings. Recently, the company lost two major contracts and all overtime has been eliminated. As a result, Fritz and Helga are having difficulty paying their bills. Several months ago they began using a local payday loan company to pay their bills on time. The first week they borrowed only a small amount to cover some past due bills. The next week, however, in order to pay back the loan plus interest, they were left with an even smaller amount to pay bills resulting in a higher payday loan the second week. In paying back the second week’s loan, their remaining available funds were further reduced. This cycle continued until they were no longer able to borrow because the repayment plus interest would have exceeded their paychecks. Fritz and Helga have had their cars repossessed, their home foreclosed on, and they are preparing to file for bankruptcy.

a. Is the payday loan company being ethical in continuing to loan more and more to Fritz and Helga each week?

b. What could Fritz and Helga have done to avoid ultimate financial ruin?

Solutions

Expert Solution

(a): No. the payday loan company is not being ethical in continuing to loan more and more to Fritz and Helga each week. This is because the payday loan company was taking advantage of Fritz and Helga’s distressed financial situation to further their business. The payday loan company knew of the depleting financial capability of the couple but still continued to grant them loans. This was done with the sole objective of maximizing their business and to earn as much interest as possible on the loans advanced by them.

(b): Fritz and Helga could have avoided the financial ruin by putting in place a proper financial plan for themselves. They should have tied their expenses to their basic salary because the basic salary is fixed and guaranteed. Tying their expenses with their overtime earnings was a mistake because the overtime earnings can never be constant and will usually vary from one period to another. The couple should have done proper financial planning and should have used a large part of their overtime earnings for investment purposes and building a corpus for future use. For example they could have invested a majority of their overtime earnings in avenues like mutual funds, ETFs, etc. Their day to day expenses should have been limited to their basic earnings.


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