Does anything good come of high cost lending?

This evening I’m thinking about if there is any upside of high cost lending. I’ve spoke to a few people that were really grateful of having credit available during times of need. HOWEVER, the majority of people that I speak to and that visit this sight are in a pretty desperate situation.

I think there is a good argument to say that the majority of people in a desperate situation should not have take a high cost loan. In speaking to some, they’ll take a loan to get a new car, when they’ve got a working old one. Or they’ll take out a loan to buy the latest phone, when you can pick up a perfectly reasonable smart phone second hand for less than £150 these days.

Making credit available, and available without any conversation as to why they want to money is dangerous and facilitates bad behaviour.

You have to think that these people would not have gotten themselves into financial difficulty if these products were not available.

What if these products were not available? What would happen to society? Well it would probably be better, for starters, with less money going to lenders and more money retained my the general public. If the credit doesn’t exist, if the interest rates and fees aren’t there to financially ruin you, then people are going to be better off for it.

But there are circumstances where high cost credit genuinely helps people. And why should just the rich prime customers have access to credit, why shouldn’t it be available to the masses? – this is the counter argument.

So what’s the solution? I don’t have it, and it’s likely not a single magic bullet – there are complex socioeconomic factors at play here. However, there’s a couple of things that come to mind:

  1. Better financial education – if a person knows what they’re getting themselves in for, they’ll be less likely to borrow irresponsibly. This responsible is on the public education system and the lenders themselves.
  2. Let’s start talking to people – maybe not a conversation over the phone, however there has become a worrying trend of “two minute” applications – how the hell is a company to assess if a person are borrowing for the right reasons in only two minutes – there’s emerging technologies with chat bots and AI that could assist here, however I’m worried that lenders have no motivation to implement such a process as it would hurt their conversion rates and ultimately earn them less money. All lenders care about is if you will repay the principle plus interest.

Man, I don’t know what the solution is. All I know is the system is screwed. Big corporations are exploiting the vulnerable – not vulnerable in the FCA’s definition of the word, but vulnerable in the sense that we don’t know any better – we take out credit and it has impacts on our life that spans into years or even decades.

Debt can be devastating to ones life – one bad loan and you get into a debt spiral – you get stressed, you get divorced, your credit score plummets. You miss a car repayment, you lose your car, you can’t get to work, you lose your job. This is an extreme scenario, this person sounds like the unluckiest person in the world, but to a certain extent everyone is effected by the credit decisions they make.

Lenders need to act more responsibly – do better by our society and not just look to make a quick buck.

Lenders, take a look in the mirror.

Borrowers, think twice, educate yourself and don’t make hasty decisions when it comes to credit.

Good luck,

John (AKA Money Nerd)