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Fringe Lending - Is it Moral?
Payday and fringe lenders are short term credit providers that offer credit at exorbitant cost to consumers who are denied access to mainstream credit. An issues paper prepared by the Queensland Office of Fair Trading in 2002 found that people borrowing from fringe lenders are largely excluded from the mainstream banking sector and that is precisely why they are so vulnerable. Customers of fringe lenders rarely discover the cost of credit until they are at the point of sale and, by this time, they are likely to have psychologically committed to the transaction and are unlikely to take away this price information to compare with another lender. Another practice that is currently being exploited is the so-called interest-free loan. This practice is done by incorporating an often exhorbitant interest factor on top of the sale price, thus not declaring the amount as 'interest'. The current regulatory focus on disclosure requirements in protecting consumers who access credit through fringe lenders seems misconceived, given that low-income earners without real choice are unlikely to be influenced by the fees and charges disclosed in accepting a loan offer. Studies have suggested borrowers of fringe lenders do not fully appreciate the costs of the credit and do little or no shopping around between different lenders. For people who live at or below the poverty line, or people who fall dangerously into debt or have bad or no credit, life in the fringe is a nearly inescapable trap of high interest rates and predatory lenders. An issues paper prepared by the Queensland Office of Fair Trading in 2002 found that people borrowing from fringe lenders are largely excluded from the mainstream banking sector and that is precisely why they are so vulnerable. Unfortunately, the reach of the community/informal market is very small, and most financially excluded consumers will find themselves resorting to the high cost and arguably exploitative products available in the fringe market. We consider here whether it would be possible to regulate fringe credit providers to provide loans on reasonable and fair terms, but suggest that the reliance on disclosure regulation in relation to fringe credit is an inadequate regulatory response and that ‘command and control’ models of regulation are likely to benecessary in regulating the fringe sector. Further research will be required to answer the question as to whether fringe credit providers, such as payday lenders, should be allowed tocontinue to service low-income consumers, on the basis that regulation could beenacted which would facilitate and require the provision of loans by them onreasonable and fair terms. The Office of Fair Trading in NSW undertook research of the micro-lending industry earlier this year by sending letters to more than 30 credit providers who were identified as fringe lenders. As well as the research undertaken in New South Wales by the Office of Fair Trading, Queensland and Victoria are currently involved in projects involving the fringe lending industry. It is interesting to note that a fringe lending paper identified that fringe lenders operate for their own benefit and that this market is unlikely to have an interest in limiting profits to address problems faced by borrowers. What can be done? Lets start by contacting our local Member of Parliament, State and Federal and let our feelings known regarding these predators; talk to the media; get people involved who have the legal finesse to look into the legality of the contracts tentered, and their ability to in fact take a lien on the goods; get the public involved.
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Contributor's Note
For more informatin regarding the fringe lending practice and the resultant financial problems created by Motor Finance Wizard, please go to http://www.damnwizard.com
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