Pay Day Loans Judgement Day - Could Interest Rate Cap Trigger Ponzi Debt Industry Collapse?
Politics / Debt & Loans Nov 25, 2013 - 08:13 AM GMTBy: Nadeem_Walayat
The government and FCA regulator are finally starting to get their act together concerning the legalised loan sharks that comes perhaps as long as a decade too late for many victims of the Pay Day Loans industry that entices usually inexperienced and desperate borrowers to get into debt at rates of interest that ensure that rolled over debts will soon multiply to many times the original sum borrowed.
Even today, the Citizen Advice Bureau reports that 75% of pay day loans borrowers struggle to repay their loans, and that lenders break promises to freeze interest and charges 84% of the time.
I have been warning for at least 5 years of the dangers that the Pay Day loans industry represents for potential borrowers that ultimately represents a failure of both the previous Labour government, current Collation government and FSA / FCA to properly regulate and cap interest rates charged by what amount to legalised loan sharks.
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Pay Day Loans - During the great recession many pay day loan outfits have sprung up that offer to fill the gap between each pay cheque with near instant small loans of upto £1000 that borrowers are further enticed to roll over into the next pay day. To be blunt, if you are considering these types of loans then you might as well put a gun to your head for all of the distress they will eventually cause you. Whilst the base rate is at 0.5%, pay day loan outfits are charging over 2,000% APR. These types of loans should be illegal in Britain but they are not, which just illustrates how inept the financial regulator is in allowing ordinary citizens to fall victim to 'legal' loan sharks. If the FSA had the best interests of the general public at heart then it would lobby the government to introduce legislation to CAP ALL interest rates at base rate plus 10%. Yes it would mean that the financially illiterate presently taking on extremely high risk loans would usually be denied loans due to the risk / reward factor, but that is how it should be.
The Pay Day loans industry is just further evidence of Britain's Bankster run financial system that has been supported by the regulators that have looked the other way so that their colleagues in the financial sector have fleeced the most vulnerable in society of their meager earnings. The financial entities that deliver Pay Day Loan services charging as much as over 4,000% APR are typically subsidiaries of tax payer bailed out banks that refuse to lend at lower rates thus forcing vulnerable customers into the arms of their Pay Day subsidiaries.
However, with an general election fast approaching, the Government is responding to growing outrage amongst potential voters and the recently renamed FSA as the FCA are giving indications of cracking down on the loan sharks that they have looked the other way on for the past decade in the form of a interest rate cap to be amended to the Banking Reform Bill that is currently going through Parliament. Unfortunately, given the governments and regulators abysmal track record, it is highly likely that there will be many loop holes built into the legislation so to allow business as usual.
Pay Day Loans Subprime Debt Industry Collapse?
Whilst its good news that the FCA will finally be targeting the the aggressive debt collection practices of the largely unregulated payday loans industry that has mushroomed over the past 5 years to stand at well over 250 providers, all competing against one another to lend money to those that cannot afford to repay the loans in what appears to be a classic Ponzi scheme-esk structure where loans are usually given to individuals without any background checks that are increasingly for the purpose of repaying loans taken out from other payday lenders, and then again and again which means that payday lenders are effectively paying one another resulting in what is a growing Ponzi pyramid primed for collapse.
You all should know how this could all end for we have seen it all before with the US subprime crash that triggered the financial crisis of 2008, something that we are still trying to overcome.
In fact Payday Loans is Subprime on speed, which means that when the Pay day loans Ponzi bubble bursts it will be in a far more spectacular style than the slow burn that was subprime crash that started to go belie-up in early 2007, taking a good 18 months to hit the financial armageddon stage.
With the stage now set for the government to finally start to act to deal with these legalised loan sharks, so the pay day loans industry is primed for a market to collapse, because financial markets discount the future, they propel a trend into the stratosphere that is primed for a crash, just as is the case with every bubble.
The collapse of the payday loans industry could take place over a matter of weeks or even days as the tulips that the payday loan companies are nurturing (borrowers) are realised to be seen as worthless as they will never be able to repay the debt, and then, suddenly the penny drops and all of the monies invested (loans) cease to exist ponzi style because the merry go around of cycling loans between providers comes to an abrupt end, just as during August 2007 the mortgage backed securities market froze on the realisation that the triple AAA MBS that the banks were invested in were worthless and so were the insurers who had insured the MBS against default.
What Will be the Consequences of the PayDay Loans Ponzi Scheme Collapse?
When the Ponzi scheme eventually does collapse then the fallout will be on the investors and lenders to the payday loan companies, just as with the subprime mortgages these investors and lenders will have been solely focused on the size of the ever expanding payday loan books, all without realising that the loan books were increasingly effectively comprised of monies used to repay other payday loan companies in an ever expanding debt pyramid, which is backed by no real assets, as those that tend to heavily borrow from payday loans have already exhausted every other avenue in terms of using up any collateral they had.
My only hope is that the fools in Westminister do not throw a further estimated £10 billion more of tax payer monies in bailout cash at the banks many of whom will be found out to be heavily exposed to the payday lenders, just as following the subprime crash of 2008 the banks then plowed headlong into peripheral Euro-zone government bonds, that a year or so later started to collapse thus triggering a further series of mega taxpayer funded bank bailouts.
Therefore, I come back to my original conclusion the eventual legislation will be heavily watered down with many loopholes aimed at supporting the pay day loans subprime lenders from collapsing. I can imagine that today's high interest rates will convert into a myriad of fees that will be added on, much as banks such as the Halifax charge £1 a day even if you only go £1 into debt on a planned overdraft, whilst an unplanned overdraft of £1 gets hit with a £5 daily fee!
So an interest rate cap will likely result in little reprieve for pay day loans borrowers because the Government, and FCA will be more afraid of the consequences of a collapse of the Pay Day Loans industry, especially in the run up to a general election.
Source and Comments: http://www.marketoracle.co.uk/Article43270.html
Nadeem Walayat
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Nadeem Walayat has over 25 years experience of trading derivatives, portfolio management and analysing the financial markets, including one of few who both anticipated and Beat the 1987 Crash. Nadeem's forward looking analysis focuses on UK inflation, economy, interest rates and housing market. He is the author of four ebook's in the The Inflation Mega-Trend and Stocks Stealth Bull Market series.that can be downloaded for Free.
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