Question

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 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?

Answer 1

a) Payday loan company is not ethical in continuing to loan more and more to Fritz and Helga each week. The payday loan company shall assess the credit worthiness of Fritz and Helga before granting them any loan. Payday loan company shall derive the credit worthiness by analyzing the credit score of Fritz and Helga. By analysing the credit score, Payday loan company can understand the repaying capacity of Fritz and Helga and whether they have repaid the loans on time previously or not.

Since payday loan company did not assess the credit worthiness of Fritz and Helga and granted them loan without any background check, Payday loan company is not ethical in continuing to oan more to Fritz and Helga.

b) Fritz and Helga should have used the following approach to avoid ultimate financial ruin.

Fritz and Helga should foremost do the financial planning for themselves. If they find that they are unable to do financial planning on their own , they may hire a professional financial planner to do financial planning for them by analyzing their required return and risk appetite.

Fritz and Helga should analyze their monthly expenses and their income. While doing the same, they should only take into account only their fixed income which they will earn without any contigency. They should cut down on all unnecessary expesnes which are resulting in financial burden. Also on the basis of their income, they should save and invest certain money every month for any future catastrophe. Financial planning aids in living life within one's means and also save for future.  

Good and sound financial plan would have prevented Fritz and Helga from their financial ruin.

Also their appraoch to take loan to pay expenses, and further take more laons to pay back old loans led them stuck in a vicious circle of financial crunch. Instead of taking loans, Fritz and Helga should have taken steps to cut down on their expenses immediately and try to get a part time job to fill the gap between their expenses and income