Competition Before Legislation
The debate on whether bad credit loans should be subject to the same rules and regulations as their traditional alternatives continues. But recently lawmakers are crafting bills that seek to redefine the public’s understanding on bad credit loans. Just last year, a bill was created seeking to abolish the term payday loans and replace it with short term loans. The reason was because the term “payday loans” has been subject to a lot of criticisms that resulted in legitimate lenders being put into bad light.
Just this year, a Magic Valley senator created a bill that aims to cap the interest rate of bad credit loans. Although the entire bill is targeted to Idaho’s payday loan industry, it might affect the rest of the states if passed and positive results are seen.
According to reports, the bill proposes to cap interest rates at 36 and enforce 100% transparency and all bad credit loans. The 100% transparency is already in effect in most states that have legalized bad credit loans. The only provision of the bill that is expected to be deeply discussed in the senate would be the terms of the capped interest rate.
What Lenders Have to Say about the Bill
According to lenders, there’s no need to create a law that would dictate a 36% capped interest rate. Such law will not work since not all lenders are monitored by the state. Instead, lenders suggest that competition will do better at keeping the interest rates low. In this regard, they would need help from the community and the government to encourage more entrants into this industry.
Adults are the only people allowed to enter contracts of bad credit loans and that is because they are capable of deciding for themselves. At present, there are thousands of bad credit lenders online vying. Their number vs. the number of borrowers seeking bad credit loans is enough to enforce competition. If left on their own, it is highly likely that they would willingly lower their interest rates and fees. That is the law of supply and demand.
Other Possible Solutions to Issues Raised about Bad Credit Loans
Some financial analysts believe that lenders need to take the time to learn how to correctly assess the risk of default of each borrower. Correct assessment of risks will help the lender accurately gauge the price of the loan. However, this possible solution would force lenders to overhaul the terms and guidelines that they already have in place. Currently, all borrowers are given the same interest rates despite their differences in risks. If the proposal is to be realized, then you would see a big change in the total cost of bad credit loans.
Another possible solution worth looking into requires some a review of the loan underwriting process. In almost all financial institutions the underwriter has a major say on how the loans are going to cost. Different underwriters use different set of criteria to determine the default rate of a borrower. Factors such as location, age and employment status affect the assessment of a borrower’s risk of default. Hence, to tackle the issue of the thoughts of that credit loans it is imperative that the underwriting process be reviewed as well.
The online lending industry is a fast growing market that affects the US economy. In three years’ time, it will have 68% of the total revenue generated from consumer loans. Therefore, it should be monitored, regulated and revised to serve the best interest of the people. In order to reach a win-win situation, legislators must listen to both sides-the borrowers and lenders of bad credit loans.