Over the last couple of days I’ve been sucked into the NFL Draft. It’s amazing to me how many people study it down to the smallest detail. It reminds me a little of my wife’s American Idol sites. The strange thing about me being interested in it is that I don’t follow college football at all. I don’t think I watched 10 minutes of it in the last 3 or 4 years combined – maybe it was on in the background and I looked up or something. I should have even less interest in watching the draft this year as there’s no guarantee of football season given the players and owners don’t have a collective bargaining agreement.

That lack of a collective bargaining agreement brings out a few personal finance questions. I wrote before about how some NFL players’ are handling their money well with the labor stoppage. Today, thanks to an article that Kosmo from the The Soap Boxers passed on, we can get a glimpse at the other side – what happens when NFL players’ don’t handle their money well.

The article’s title will give away much of the story: Cash-Strapped NFL Players Seeking High-Risk “Lockout Loans”. It’s a great article and worth reading on it’s on own in its entirety. However, for those who want a quick version, here goes:

With the lockout players aren’t making the money anymore. They either have financial commitments or serious lifestyle inflation combined with a lack of savings that render them cash-poor.

What you have here is a perfect storm of potential problems for players:

• You have a lot of young people who made a lot of money quickly and generally presumed that it would likely keep coming – at least throughout their career.
• In addition to that, there’s a question of intelligence amongst the players. While I contend NFL players are likely to be the most intelligent in sports (they don’t come straight from high school, giving them education and the nature of the sport often requires more thinking), many wouldn’t agree with me and label them as “dumb jocks.”
• You have a situation where other people typically control their finances. You hope that they had responsible money managers, but you can never tell.
• You have everyone on their brother trying to scam you because they know you have money.

This situation attracts wealthy lenders who are willing to come in and fill the void – at a price. That price is between 18 and 24% according to the article. And if they default – it can jump up to 36%. The article says that 10% of players have secured this kind of funding and another 20% are in the process of getting this funding. As the lockout continues the number will grow. In addition to these interest rates, the players may be required to get insurance for the loans (since they are athletes with high risk to injury) that requires additional money.

The main question the article puts forth is, “Are these loans predatory?” It presents two sides:

For the lenders, by financial advisor to a number of NFL players Sherard Rogers :

“There’s a market, there’s a demand, and I’m helping an industry that I benefit from also – helping them to better themselves and to make a difference… It’s not as if financial advisors setting up these loans are just vultures coming in trying to seize the opportunity to make as much money as possible because we’re dealing with professional athletes,” Rogers said. “The key is to figure out how to solve the short-term liquidity issue and put the pieces in place to ensure they don’t have this liquidity issue again.”

For the players, by Arizona Cardinal Kicker and NFLPA representative Jay Feely:

“Sounds like total B.S. I think it’s predatory and unjust. I don’t think they should be charging those interest rates and I would encourage every player [considering high-risk loans] to look elsewhere. I think if you went to your bank, or outside lending agencies, you’re not going to pay that kind of interest. That’s absurd.”

The article then makes a great point that Feely may not be accurate about the bank or outside lending agencies helping. Since the sub-prime lending fiasco of a few years ago, getting is loan is harder than ever. Trying to get a loan when you are essentially unemployed is even worse. Being young, it’s also quite likely that they haven’t built up a credit history.

First let me tackle the question of whether it’s predatory. My initial thought is that these loans aren’t predatory at the rates described. These are payday loan rates, they are similar to credit card debt rates. I may change my view after looking at what any required insurance costs them. However, I don’t have that information.

My other thought is what can be done about the situation?

1. I would suggest the players take a hard look at their finances and their assets and liabilities. Perhaps they should look at what they can sell to meet financial obligations. It’s a hard recommendation for me to give, because the lockout could end next week and the player would have taken a loss if they were buy it back.
2. The NFL Player’s Association has a lockout fund that would pay each player up to $60,000. Some of the more generous players who have presumably good financial skills like DeMarcus Ware have foregone taking that money to help players who need it more. The $60,000 is not considered enough for many NFL players though.
3. Players could take loans from other players. This seems to be one of the most natural solution, since they are all in this lockout together. They share the same locker room and are often “on the battlefield” (as it is called) together. I know that lending money to friends can be a touchy subject. Still, it seems like some of the richest players could get together and create a fund to lend out money at better rates if they wish.
4. If players have good enough credit, an option is to look at P2P lending companies such as Lending Club or Prosper. Lending Club’s maximum loan increase to $35,000 could stem the tide. However, for the players that qualify, they may only find marginally better rates than the 18% mentioned in the article. As a P2P lender, I don’t know if I want to lend to a NFL Player. On one hand, they have a public image, so they wouldn’t want the public defaulted loan on their record. On another, I could see them putting off making payments when football starts back up because they’ve got bigger things going on (getting caught up and in shape for the season).

Finally, I leave you with this. The financial advisor quoted in the article suggested the situation could be considered a “coaching moment.” That sounds like some tough love, but it’s got a lot of truth behind it. Financial responsibility often comes from overcoming financial difficulties.