Forum for Science, Industry and Business

Sponsored by:     3M 
Search our Site:

 

How major lenders could help hard-up borrowers avoid the slide into debt

18.07.2005


Mainstream financial service providers should help their rejected borrowers improve credit ratings and avoid sinking deeper into debt, by collaborating with high-interest lenders, many of which they own, argues a new report sponsored by the ESRC.



Better liaison and advice might prevent shocking cases such as that of the Meadows family of Southport, who hit the headlines last October after a loan of £5,750 shot up to a staggering debt of £380,000, says a study at Keele University led by Professor David Knights.

Professor Knights, now at the University of Exeter, said: “The Meadows case placed the whole issue of credit and lending into sharp focus. It was a particularly graphic example of how a relatively benign loan can get way beyond the ability of ordinary people to cope.”


Redundancy for salesman Tony Meadows led to payments on the loan not being paid. As a result, not only were arrears charged at 34.9 per cent, but also the basic repayments.

Around 20 years ago, the introduction of credit scoring pushed less well off consumers further into using what are known as ‘sub-prime’ lenders. These firms offer loans to people rejected by the mainstream lending companies, and cover their risks by charging very high interest rates.

Understanding of financial implications of borrowing remains low, says the report. And though ‘sub-prime’ firms help people consider whether they can afford credit, advice tends to be limited to that necessary to comply with legislation or codes of practice.

More recently, the decline of door-to-door savings and insurance services has cut further the already limited range of options available to the socially disadvantaged.
Many failed the strict and rigid restrictions of credit scoring, resulting in a gap in the credit market, which soon began to be filled by the rapidly expanding ‘sub-prime’ suppliers who do operate door-to-door.

We have also seen the development of what are called ‘near-prime’ lenders, operating through mass-market advertising in daily newspapers and on daytime TV. These also charge high rates of interest, but collect through banks, imposing penalties through ‘ratchet’ increases in charges immediately a repayment is missed.

Professor Knights said: “The ‘ratchet’ system and encouragement to check ability to repay may help consumers improve their financial understanding, but the effect is extremely limited, since it remains focused on the repayment rather than on other aspects of the contract.

“It does not provide any warnings of the kinds of financial trouble which can be experienced, where comparatively trivial unsecured loans escalate into debts that lead to the repossession of homes and probably into the bankruptcy courts.”

The study suggests that one positive outcome from the financial self-discipline encouraged through ‘near-prime’ lending is that it possibly helps consumers move up to the mainstream market, where interest rates are much lower.

But says Professor Knights: “This would be achieved much more rapidly if major lenders collaborated with ‘near-prime’ providers with the aim of assisting borrowers to graduate to mainstream credit.

“Many ‘near prime’ providers are wholly-owned subsidiaries of mainstream corporations, although operating under a different name to protect the brand of the owner.
“A more responsible way of behaving would be to seek to move borrowers up to the mainstream when they have reasonably long histories of not defaulting on their payments.

“This would require better liaison between the owner and the subsidiary, but it would not only be educational and good PR, it might also prevent customers switching to other lenders as they improve their ratings.”

Becky Gammon | alfa
Further information:
http://www.esrc.ac.uk

More articles from Social Sciences:

nachricht Fixating on faces
26.01.2017 | California Institute of Technology

nachricht Internet use in class tied to lower test scores
16.12.2016 | Michigan State University

All articles from Social Sciences >>>

The most recent press releases about innovation >>>

Die letzten 5 Focus-News des innovations-reports im Überblick:

Im Focus: Breakthrough with a chain of gold atoms

In the field of nanoscience, an international team of physicists with participants from Konstanz has achieved a breakthrough in understanding heat transport

In the field of nanoscience, an international team of physicists with participants from Konstanz has achieved a breakthrough in understanding heat transport

Im Focus: DNA repair: a new letter in the cell alphabet

Results reveal how discoveries may be hidden in scientific “blind spots”

Cells need to repair damaged DNA in our genes to prevent the development of cancer and other diseases. Our cells therefore activate and send “repair-proteins”...

Im Focus: Dresdner scientists print tomorrow’s world

The Fraunhofer IWS Dresden and Technische Universität Dresden inaugurated their jointly operated Center for Additive Manufacturing Dresden (AMCD) with a festive ceremony on February 7, 2017. Scientists from various disciplines perform research on materials, additive manufacturing processes and innovative technologies, which build up components in a layer by layer process. This technology opens up new horizons for component design and combinations of functions. For example during fabrication, electrical conductors and sensors are already able to be additively manufactured into components. They provide information about stress conditions of a product during operation.

The 3D-printing technology, or additive manufacturing as it is often called, has long made the step out of scientific research laboratories into industrial...

Im Focus: Mimicking nature's cellular architectures via 3-D printing

Research offers new level of control over the structure of 3-D printed materials

Nature does amazing things with limited design materials. Grass, for example, can support its own weight, resist strong wind loads, and recover after being...

Im Focus: Three Magnetic States for Each Hole

Nanometer-scale magnetic perforated grids could create new possibilities for computing. Together with international colleagues, scientists from the Helmholtz Zentrum Dresden-Rossendorf (HZDR) have shown how a cobalt grid can be reliably programmed at room temperature. In addition they discovered that for every hole ("antidot") three magnetic states can be configured. The results have been published in the journal "Scientific Reports".

Physicist Dr. Rantej Bali from the HZDR, together with scientists from Singapore and Australia, designed a special grid structure in a thin layer of cobalt in...

All Focus news of the innovation-report >>>

Anzeige

Anzeige

Event News

Booth and panel discussion – The Lindau Nobel Laureate Meetings at the AAAS 2017 Annual Meeting

13.02.2017 | Event News

Complex Loading versus Hidden Reserves

10.02.2017 | Event News

International Conference on Crystal Growth in Freiburg

09.02.2017 | Event News

 
Latest News

Stingless bees have their nests protected by soldiers

24.02.2017 | Life Sciences

New risk factors for anxiety disorders

24.02.2017 | Life Sciences

MWC 2017: 5G Capital Berlin

24.02.2017 | Trade Fair News

VideoLinks
B2B-VideoLinks
More VideoLinks >>>