The issue of credit has been controversial for hundreds of years. Now, more than ever in the advent of payday loan companies who offer customers credit facilities at high interest rates. This article discusses the issue of whether it is creditors or borrowers who get a raw deal in the financial services market and questions whether the borrowers really do need the special protections some say that need.
Borrowers can be seen as having relatively low bargaining power compared to big, faceless corporations whose profits are in billions every year. This is one of the reasons why some people automatically assume that borrowers are the people who get a raw deal in the financial services market. Vulnerable people, who are also borrowers are particularly liable to be classed as being taken advantage of by big bad corporations who profiteer from lending money and charging interest on the loans. Some borrowers have no other option but to borrow money from payday loan companies who charge very high interest rates. The situation is complicated if these loans are not paid back as they are supposed to be, because then the loan can accumulate rapidly putting the defaulter into more and more debt. Basically, the availability of credit facilities can encourage some people to engage in irresponsible spending with the result that they are in debt for the rest of their lives; face losing their homes and working endless hours to pay back money which has long been spent. Reputable companies like Wonga, Santander or the Halifax never encourage irresponsible spending with borrowed funds like a personal loan, but there are some companies that do and people can fall victim to these sorts of illegal companies.
On the other hand, the UK has just come out of a recession and due to this factor more than ever, some people form the view that creditors are actually in the position of getting a raw deal in the financial services market. Creditors are faced with a particularly difficult financial climate. Additionally, creditors like banks and the plethora of payday loan companies that are now available must rapidly adjust to an unpredictable regulatory culture surrounding the issue of credit facilities. The recent decision of a county court judge to forgive the debts of a debtor who spent thousands of pounds on a store card on the basis that the card was unsolicited has caused much uncertainty for creditors like Santander and M&S whose businesses depend heavily on profits made from financial services. Additionally, consumers these days are very well protected through regulation relating to debts. There is only so much a creditor can do to recover their monies before they simply have to write them off. Also, facilities which limit the position of creditors like IVAs and Debt Management Plans are widely available to debtors with the result that the creditor can recover as little at 10% of the total debts due.
There are not really any answers as to whether creditors or borrowers get a raw deal or not, but what is clear is that the debate is likely to continue and intensify as consumer spending on credit facilities continues to increase.