The education system of a country is supposed to provide children and young adults with the knowledge and skills necessary to live a productive and safe life.
However, there are many aspects of life that are left out of school curricula, and one of those very basic elements is personal finance education.
If even the most involved business and finance university programs neglect to provide practical education on dealing with the dangers of high-interest loans, how are people that have never enjoyed such an education supposed to know about it?
Lawmakers are constantly legislating for change in every aspect of their constituents’ lives but somehow a topic as serious as high-interest lending has escaped their scope. Sure, there are some guidelines that govern the space but one needs to look no further than the mortgage lending origins of the 2008 financial crisis that got its start in the United States and spread like wildfire to every inch of the globe.
I want to take this opportunity to discuss the dangers that exist with the current space and how Credit Unions can make lending a viable and safe option for obtaining capital while safeguarding people’s finances and health.
Where Did Lending Start and Why is it Important?
The lending system has been around for approximately 3000 years and its origins can be traced back to ancient Greece and Rome. An intermediary would arrange for collateral to be held as a hedge against the risk involved with providing a loan. This system of regulating transactions between lender and borrower has come a long way and current practices are a lot more involved than when lending appeared.
Having access to personal loans is a viable way to finance a new business or complete a task that needs to be done when the funds for it may not be immediately available. If a family has one or two solid sources of income, borrowing a reasonable amount in order to purchase a home can be a viable option. The same holds for a prospective business start-up. A business plan that is based on extensive research and where due diligence has been conducted can provide the capital necessary to get the enterprise off the ground.
Effects of High Fee, High Interest Lending
The number of people whose lives are adversely affected by high-interest lending is growing.
It’s easy for people to overestimate their business plan’s reach or to live beyond their means by simply securing a personal loan. If you add credit card debt, high interests can quickly build up to a downright financial calamity for an imprudent loan-seeker.
Physical and Mental Health
A recent US study showed that people that use short-term credit that bears high interest are 38 percent more likely to report poorer health than those that did not engage in this practice.
One of the hardest-hit countries of the recent financial crisis was Greece. Its near-expulsion from the European Union due to the accumulation of debt in the government and private sectors caused a 40 percent increase in the suicide rate. Similar numbers can be observed in other parts of the world where high-interest lending has been left unchecked.
Other Important Consequences of High Interest Lending
High-interest lending leads to people spending less money in the medium to long-term. It is not evident immediately because the availability of money circulating in the economy may be greater due to the many loans given out, but eventually, economies are led to stagnation as people struggle to repay their high-interest loans by cutting back on their expenditures. Demand drops and Gross Domestic Product (GDP) plummets.
Effecting Positive Change
We need not paint a picture of complete doom and gloom for all lending. As I mentioned above, a healthy attitude on the subject and a thoughtful and compassionate regulatory environment can foster healthy economies where people are able to secure funding in order to fulfill their dreams.
The existence of street-front lending is continuing to cause irreparable damage to our communities and hurting families. Homes are being broken and it isn’t uncommon for children to be left hungry; something we cannot stand for. The basic premise behind the existence of credit unions is that it offers credit to loan-seekers at competitive rates. The objective is to help people rather than to prey on their need for liquidity. Many of the new legislation only regulates those lenders that care while having little effect on lenders that operate on greed.
Recently the government of New Zealand capped interest on lending at 292% per annum. This may not be nearly enough of restriction but it does set a precedent. Personally, I believe it’s not nearly enough and that it should be less than 40% maximum.
Learning from the Past
The 2008 financial debacle made it abundantly clear that when bad credit loans are left unchecked, a large debt burden can build with its ramifications spreading to all aspects of an economy. While it shouldn’t be illegal for an individual to be able to secure a loan while having bad credit, checks and balances need to be in place to make sure that approvals are made on a case-by-case basis. Also, higher interest rates for people with bad credit may be financially intuitive but are a recipe for disaster for debtors that do not have a viable way of repaying their loans.
In order to bring about lasting change, it is necessary to think outside of the prevalent paradigm. It is also necessary for all stakeholders in the matter to come together. Credit unions are paving the way for a more healthy and sustainable lending system promoting a credit system where families can be happy and individuals can fulfill their dreams.
Contact us today and let’s talk about how we can help you achieve your personal finance goals.
If you want to find our more about Westforce Credit Unions and its impact, please go to: https://www.westforce.org.nz/smile/
If you need help with a loan, please go to https://www.westforce.org.nz/personal_loans/