Experts Warn Bad Credit Loan Restrictions Will Create Loan Sharks
All over the world, particularly in the United States and Great Britain, the payday loan industry has come under intense fire from regulators and consumer activists. As a result of numerous complaints and multiple reports of debt spirals, elected officials are looking to regulate the industry more than it does now.
A new report entitled “Credit 2.0” from the Consumer Finance Association (CFA), a group representing British payday lenders, argues that greater rules and stricter regulations applied against bad credit loan companies are forcing consumers to tap into loan sharks.
“The bad credit loan industry already has strict regulations and the majority of lenders abide by those rules. Tightening of this noose will have a negative impact on lenders forcing them out of business while allowing loan sharks to take their place”, said Chris Lions.
We haven’t seen the loan shark industry since the time of the bootleg era and numbers racket (1920s to 1940s). Loan sharks would provide you with money at a very high interest rate. If you didn’t pay it back then loan sharks would break your legs. Anyone who has ever seen a Warn Bros. gangster picture would know.
The CFA says that the market has been self-regulating over the past couple of years, and this has led to a number of successes. For instance, there has been a 70 percent reduction in the number of loans being approved each month, when compared to 2013.
Moreover, the CFA warns that more regulations is forcing the payday lending market to mimic that of the United States. In the Land of the Free, the CFA claims, about 60 percent of all short-term loans originate from unscrupulous lenders, the organization warns.
Here is the headline-grabbing statistic from the CFA: one-third of Britons rejected for a payday loan are mulling over the prospect of going to an illegal lender.
“Credit 2.0 takes a fresh look at alternative forms of credit, including short-term loans, and shows that turning off the credit tap has had no impact on demand or debt levels,” said CFA CEO Russell Hamblin-Boone in a statement. “It is an attempt to educate all those who continue to call for further restrictions on lenders without considering the consequences for millions of families.
The Financial Conduct Authority (FCA) has installed rules for the industry in the last couple of years. Some of the regulations consist of capping fees and interest, while banning storefronts from rolling over a loan more than two times.
Carl Packman, author of a book on payday loans, told the Daily Mail that he hasn’t seen any data to suggest the amount of payday loans has fallen and that loan shark businesses are returning.
“There is no evidence that illegal loan sharking is on the rise and it is dishonest to pretend otherwise,” said Packman. “What the CFA is guilty of today is to suggest that sensible regulation over the controversial and out-of-control payday lending industry is anything other than a good thing.”
He added that the general public won’t be fooled by the CFA’s report, noting the group wants to have less attention on its members because of profits. “But we shouldn’t stand for it. Protecting consumers by tackling loan sharks and regulating payday lenders should not be mutually exclusive.”
The payday loan industry in the United Kingdom is a billion-dollar niche. Each year, around one million people take out about four million loans with an average loan size of £270 ($410). Across the pond, two-thirds of borrowers are impoverished and have incomes of around $25,000.
Due to the high cost of lending money at a short-term rate, the payday loan industry may be forced to either change its business model or leave the market entirely. This is likely just the beginning of regulatory introductions.