With Payday loan companies coming into the regulator's sight, more and more people are being forced into other forms of borrowing.
The Financial Conduct Authority has taken responsibility for the oversight of the Payday loan companies. They have already demanded better scrutiny of applications and soon they propose to have a cap on the amount that lenders can charge.
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The change to the way lenders can charge clients will have a dramatic effect on the business model of these companies. They will have to change how they vet potential clients more than ever before. They need to be more certain that the person they are lending to has a reasonable chance of repaying the money.
It is thought that the Payday loan industry will collapse with 90% of companies withdrawing from the market.
The fact that someone has turned to this form of borrowing, would be a good indicator that they are unable to source credit from elsewhere. Perhaps the credit cards have been maxed out, or the overdraft limit achieved, for payday loan customers this really must be the last stop for them.
What we have learnt from history, is often when someone is squeezed out of a market, then it is replaced with something equally as bad or more so. With the thirst for consumerism as prevalent as ever, there will always be a need for adverse borrowing. So if you can't get a payday loan, where do you turn to? There will be existing 'companies' in this sector as well as new entrants. The existing 'companies' will predominantly be doorstep lenders, loan sharks, many of whom are completely unregulated.
As the label suggests they provide money to you at your door. There are already a wide number of companies who offer such a service. The value of these is between £100 and £1000. These are the legal routes. There will also be 'off-grid' lenders, who are not regulated by anyone. Again the value of lending will start of low, but ultimately rise. They come with a fearsome reputation. Earlier in 2014 it was reported that sixty victims of loan sharks had to be put in a witness protection scheme.
They have a reputation, people know that they charge high interest rates so why would people go to loan sharks? For the same reason they go to payday loan companies. Payday loan companies don't enjoy the easiest time in the press and their interest rates are published on their websites. But record numbers are still attracted to them. How different will it be with the re-emergence of the loan shark? The current market for this type of lending is currently £700 million per year. This will surely rise over the next few years.
You max out your credit card, so they increase the limit. Likewise an overdraft. When these have been used up, you may take out a new credit card. Paying huge amounts of interest can bite to the core of your household budget. When this happens, effectively new routes of borrowing have to be sought, increasing your debt levels all of the time. At some point you have to put you have to realise that enough is enough. More often than not its too late. From then onwards what do you do? Insolvency though an IVA or bankruptcy, perhaps a less formal debt management plan. Whatever the course of action, the point when you stop increasing your debt levels can be the time when you can finally move on with your life.
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