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 Sibling differences: Later-borns choose less prestigious programs at university
14.11.2017 | Max-Planck-Institut für demografische Forschung

nachricht Visual intelligence is not the same as IQ
09.11.2017 | Vanderbilt 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: Nanoparticles help with malaria diagnosis – new rapid test in development

The WHO reports an estimated 429,000 malaria deaths each year. The disease mostly affects tropical and subtropical regions and in particular the African continent. The Fraunhofer Institute for Silicate Research ISC teamed up with the Fraunhofer Institute for Molecular Biology and Applied Ecology IME and the Institute of Tropical Medicine at the University of Tübingen for a new test method to detect malaria parasites in blood. The idea of the research project “NanoFRET” is to develop a highly sensitive and reliable rapid diagnostic test so that patient treatment can begin as early as possible.

Malaria is caused by parasites transmitted by mosquito bite. The most dangerous form of malaria is malaria tropica. Left untreated, it is fatal in most cases....

Im Focus: A “cosmic snake” reveals the structure of remote galaxies

The formation of stars in distant galaxies is still largely unexplored. For the first time, astron-omers at the University of Geneva have now been able to closely observe a star system six billion light-years away. In doing so, they are confirming earlier simulations made by the University of Zurich. One special effect is made possible by the multiple reflections of images that run through the cosmos like a snake.

Today, astronomers have a pretty accurate idea of how stars were formed in the recent cosmic past. But do these laws also apply to older galaxies? For around a...

Im Focus: Visual intelligence is not the same as IQ

Just because someone is smart and well-motivated doesn't mean he or she can learn the visual skills needed to excel at tasks like matching fingerprints, interpreting medical X-rays, keeping track of aircraft on radar displays or forensic face matching.

That is the implication of a new study which shows for the first time that there is a broad range of differences in people's visual ability and that these...

Im Focus: Novel Nano-CT device creates high-resolution 3D-X-rays of tiny velvet worm legs

Computer Tomography (CT) is a standard procedure in hospitals, but so far, the technology has not been suitable for imaging extremely small objects. In PNAS, a team from the Technical University of Munich (TUM) describes a Nano-CT device that creates three-dimensional x-ray images at resolutions up to 100 nanometers. The first test application: Together with colleagues from the University of Kassel and Helmholtz-Zentrum Geesthacht the researchers analyzed the locomotory system of a velvet worm.

During a CT analysis, the object under investigation is x-rayed and a detector measures the respective amount of radiation absorbed from various angles....

Im Focus: Researchers Develop Data Bus for Quantum Computer

The quantum world is fragile; error correction codes are needed to protect the information stored in a quantum object from the deteriorating effects of noise. Quantum physicists in Innsbruck have developed a protocol to pass quantum information between differently encoded building blocks of a future quantum computer, such as processors and memories. Scientists may use this protocol in the future to build a data bus for quantum computers. The researchers have published their work in the journal Nature Communications.

Future quantum computers will be able to solve problems where conventional computers fail today. We are still far away from any large-scale implementation,...

All Focus news of the innovation-report >>>

Anzeige

Anzeige

Event News

Ecology Across Borders: International conference brings together 1,500 ecologists

15.11.2017 | Event News

Road into laboratory: Users discuss biaxial fatigue-testing for car and truck wheel

15.11.2017 | Event News

#Berlin5GWeek: The right network for Industry 4.0

30.10.2017 | Event News

 
Latest News

Previous evidence of water on mars now identified as grainflows

21.11.2017 | Physics and Astronomy

NASA's James Webb Space Telescope completes final cryogenic testing

21.11.2017 | Physics and Astronomy

New catalyst controls activation of a carbon-hydrogen bond

21.11.2017 | Life Sciences

VideoLinks
B2B-VideoLinks
More VideoLinks >>>