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Should Personal Loan Companies Be Required to Evaluate Borrowers' Financial Health?

[Mar 29, 2010.]


The U.S. House of Representatives recently passed a significant piece of legislation that would reshape the lending industry in many ways, including the market for unsecured personal loans. The bill, sponsored by Senator Christoper Dodd of Connecticut, still must pass the Senate in order to become an actual law.

Still, the reforms that Dodd wants from banks in terms of lending are worth considering in and of themselves, regardless of whether the bill passes or not. In particular, this bill brings up a pointed and pressing question that both personal loan lenders and all personal loan borrowers must consider:

Should personal loan companies make unsecured personal loans to people who are in deep financial trouble and will likely have problems paying back the loans as required?

Payday Loans Eat People's Paydays

One example of an unsecured personal loan that would be affected by the Dodd bill is payday loans. Basically what happens with a payday loan is that the consumer writes a post-dated check for the loan amount, plus a fee, and then the payday lender cashes the check at payday.

With this type of personal loan, as with online personal loans, the lender requires very minimal information about the borrower. Often, borrowers can get these personal loans with no credit checks. For borrowers with bad credit, a bad credit unsecured personal loan may be the only option for getting a loan.

The problem frequently arises when, come payday, the loan is not paid back because the borrower has 20 other bills that are waiting for that payday as well. Then more fees are tacked on and the borrower is now running on a treadmill of taking out another payday loan to pay the first one.

This is not to say that payday loans are inherently evil--there's a time and place for everything, right?--but certainly consumer complaints about the usurious aspect of payday loans have some basis in fact.

Personal Lenders Must Act Responsibly, or Else Regulation Is Inevitable

Companies that make bad credit unsecured personal loans complain--and they have a point--that new regulations placed on personal lenders will increase the cost of personal loans to people with bad credit, and maybe even eliminate the marketplace for bad credit unsecured personal loans entirely.

If personal lenders are required, for example, to obtain more detailed information about the financial condition of personal loan applicants rather than allowing applicants to fill out a very simple application, that obviously results in more cost for the lender in terms of reviewing the application.

The lender would then pass on that cost to the customer.

By the same token, bad credit personal lenders must take care to act responsibly if they really want to avoid being more strictly regulated.


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.

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