They specialise in allowing people to meet their bills between today and the next time they are paid. It seems an easy way to manage personal cash flow. Added to this the small loans are easy to arrange and the borrower can choose the term of the loan.
So what is the problem? Do the borrowers actually fully understand what they are doing? The interest rates are potentially 16,000% (although that is very unusual) and always much higher than borrowing from a bank or even a cash advance on a credit card.
The industry is, according to many, under-regulated. Are people being properly informed about what they are buying? This lack of information market failure can lead to disastrous consequences where consumers make bad choices, in this case buying more services than are optimal. The financial services industry has many other examples of this, such as payment protection insurance and endowment policies.
The attached article makes the concerns of many clear. People may well start taking out loans each month or week out of habit and believe they are managing their finances. In fact they will be compounding mismanagement of their finances and in the end they will reach the limit of their ability to borrow but with higher and more expensive debt.
Another worry is that this is just another example of 'sub-prime lending'. This was the cause of the credit crunch when banks extended mortgages to those who were in weak and unreliable financial circumstances. Maybe the lenders think this is safer, lower amounts and faster repayments so default on the scale of 2007/8 is impossible? But where is the moral justification for this? Lending to people not able to fully understand their product and endorsing behaviour that is unsustainable.
This does need sorting!
Although the ideas behind these companies is quite bad their behaviour is scandalous. They are exploiting the desperate in order to make huge profits. The high interest could at first be seen as acceptable as with these style of loans consumers could quite easily opt to not pay it back because they are so easy to get hold of in the first place. Looking deeper into the picture it does clearly emerge that lack of regulation is responsible as one of the essential aspects of any style of economy including a completely free market economy is to have a government to maintain law. Law derives from decency and there is nothing decent about charging 16,000% interest rates. The government needs to act quickly to resolve this market failure.
ReplyDeleteIt's unbelievable that these loans are so easy to get a hold of; I suppose that's the appeal and the point of the object. However, why they are so easy and do not go under scrutiny i.e. like in banks, is a wonder. What makes it even more ridiculous is the extent of asymmetric information, in other words, how naive the customers are. The government needs to devise plans to regulate this if it cannot end it (all in the name of a free market), if it wishes to avoid unforeseeable circumstances.
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