The search for affordable credit: The truth about legal loan sharks and the scope of credit unions

16 Aug 2013

Legal loan sharking: you either love or loath it, and because of the recession the market for high cost credit is booming. The vulnerable are being victimised into a cycle of unaffordable high cost credit, whether they like it or not. With traditional lenders of credit reluctant to lend short term loans, more and more people are turning to high cost credit in an act of desperation. Unfortunately, it’s the poor who are falling victim to legal loan sharks. In a time where wages are falling and the cost of living is increasing, the moral case for legal loan sharking is increasingly at stake. High cost credit like payday lenders have the potential to create a nation where people don’t just live off debt, but where their debt causes more debt. It’s time to crack down on legal loan sharking and look at the affordable alternatives.

 

All forms of credit come with the good, the bad and the ugly, with some more ugly than others. The failure of the Government to crack down and regulate legal loan sharking means payday lenders can charge an extortionate amount in interest rates. This is the ugly side of legal loan sharking and the result is the rolling over of short term loans to pay for the previous loan taken out; a business model based on repeat borrowers is not just morally wrong, but it is damaging to our economy. 

What appeared to be a quick fix, a one off, a makeshift solution to pay off a financial bill becomes a spiral of debt. The people who take out the short term loans are not the ones to blame, rather the industry is. The immorality originates from the fact that payday lenders target vulnerable people such as students, and financially vulnerable adults. This is big business acting in its true colours, exploiting customers by using a business model based on retaining borrowers and assisting, satisfying and pouring money into the pockets of shareholders rather than helping the people who struggle to make ends meet. A problem we have as a nation is our inactivity in helping the less wealthy, who need short term loans during a time of financial restraint in order to flourish. Traditional banks are out of the window when it comes to a willingness to lend short term because there is a lack of profit to be had, and legal loan sharks like payday lenders simply rob the poor.

So what’s the answer? 

Credit unions. 

Like I have said though, there is the good, the bad and the ugly to any form of credit. Don’t get me wrong, credit unions offer a more financially feasible transaction than payday lenders when it comes to taking out short term loans, but it comes with a price. A credit union is a cooperative, not cooperation. The owners and customers are one and act as a non-profit organisation, which means unlike legal loan sharks, any profit made is used to increase the rates of saving and lower interest rates, rather than the profit being pocketed by a shareholder. Yet all business models have their price tag. The community philosophy of credit unions would mean staying put in the locality of your credit union; hence there is a geographical constraint to affordable credit. It would also mean leaving your current bank, your NatWest or your Lloyds TSB and setting up an account with your local credit union. Moreover, the major price tag is the wealth of these credit unions; they don’t have a lot of it. Their non-profit status means there is a lack of funding for marketing and the investment needed for technology to develop online banking, limiting their market competitiveness.

Together, these pricy restraints total a bigger one. To combat legal loan sharking we need an accessible affordable alternative, yet the community philosophy of credit unions limits the geographical scope needed, and hence credit unions as a single entity won’t reduce the growing levels of national debt.

However, this isn’t to say we should dismiss credit unions altogether. There is potential to reduce individual and/or family debt by operating through credit unions, putting an end to legal loan sharking. We can get around the geographical constraint by making credit available on the existing network of ATMs. Furthermore, credit unions have something which traditional banks and legal loan sharks like payday lenders don’t –financial education. There is a web of potential for credit unions to teach thousands of financially vulnerable people the truth about legal loan sharking, which step by step could reduce individual/family debt’s across the community.

As long as the economy continues to flat line, wages fall and the cost of living increases, the number of people struggling to make ends meet will increase, which means the proportion of the population susceptible to a quick fix from payday lenders continues to increase. Legal loan sharking breeds financial insecurity and the longer the economy stagnates, the greater the challenge will be to combat these ruinous institutions.

By Alex Sargeson

 

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