5 Ways Congressional Action On Credit Card Issuers May Affect the Market for Unsecured Personal Loans

[Apr 22, 2009.]

 

Consumer groups such as the National Consumer Law Center are encouraging Congress to take swift action to stop common lending practices used by credit card companies to increase profits, such as changing interest rates on credit card balances if the borrower's credit score goes down.

Without a doubt, credit card companies are profit-driven enterprises that have not always acted in good faith with respect to the overall financial health of the American consumer. Nevertheless, consumer groups--and consumers--may find that changing laws related to credit cards may have unintended effects.

Here are five potential changes to the market for unsecured personal loans that could come of Congressional action related to credit card practices:

1. Increased Trust Between Lender and Borrower

This is the rosy scenario, and the one Congress likely wants most to achieve. As the entire financial system has undergone the great trauma of the last year, borrowers and lenders have entered into a very murky are a where neither party trusts the other. This is not how lending should work.

If Congress coerces credit card issuers into offering more transparent and beneficial rates and terms, borrowers may refind some of this lost confidence. The availability of unsecured personal loans, then, could see an uptick as trust is restored.

2. Unsecured Personal Loans Was Already a Tough Business. Now This? No Thanks

A credit card is the most unsecured of all unsecured personal loans. The lender is lending money purely on trust. Many times, this trust is misplaced. Bank of America, for example, lost $1.8 billion on unpaid credit card debt in the first quarter of 2009.

If Congress takes away the ability of credit card issuers to manage their risk, for instance by "locking in" rates even as the borrower's credit situation deteriorates, it's logical that fewer lenders will want to be a part of this business. Unsecured personal loans may become highly scarce.

3. Other Forms of Personal Loans Become More Popular

People will always need personal loans. It's just a matter of how they will get personal loans, and how much they will pay for them. Over the past decades, credit cards have taken an increasing share of the market for unsecured personal loans.

This may not be the case, going forward. Consumers are indeed fed up with certain practices of the major credit card issuers. New forms of personal loans, such as online personal loans with fixed repayment schedule personal loans, may take away market share from credit cards.

4. Rising Defaults Lead to Rising Interest Rates on All Types Unsecured Personal Loans

 If the lender-borrower relationship continues to sour, with credit cards only the most glaring example of the general trend, borrowers may default in rising numbers.

This would, in turn, raise the "cost of money" for all types of unsecured personal loans. Lenders, after all, will charge more for use of their money if they cannot rely on getting it back.

5. A Cultural Revolution Begins, Slowly But Surely

Congress is in a tough position because what they are essentially trying to do--restore a functioning relationship between borrower and lender--is not something that can be accomplished by simply passing some laws outlawing certain practices.

Rather, a total sea change may be necessary. A realization by lenders that borrowers must be respected with truthful terms, and a realization by borrowers that lenders do not owe anyone an unsecured personal loan and have a right to make money when they do make loans.

Such a cultural revolution may seem far fetched to speak of, but it's also necessary, if we as a country want to maintain a viable market for unsecured personal loans.

 

About Author:

Andrew Freiburghouse is a writer and businessman. He has worked as a magazine reporter, tax preparer, screenwriter, copywriter, and loan officer. He graduated from Santa Clara University in 1999 with a B.A. in English. Andrew was born and raised in the City of Los Angeles.