Payday Loan Companies Should Be Subject to More Regulation - Term Paper Example

Pay day loan companies should be to more regulation? Pay day loan companies should be to more regulation?1.0. Introduction In the present day world, short term loans have been a trend that the government has attempted to regulate due to the increase in the number of persons opting for the short term loans. The pay day lenders have been seen to offer short term loans which have high interest rates (Citizens Advice Bureaux, 2014; Cackley, 2011.). Despite this fact, it is evident that lots of people still prefer these short term loans. The payday loan lenders work on the basis that the money should be paid within a month. The pay day lenders would then be descried as individuals who sort out urgent financial difficulties. Vega (2014) argues the loans offered range from £100 to £1000 and this is offered for a period of few weeks or months. However, these lenders face a lot of criticism. This is because lots of people argue that they lend money irresponsibly and charge very high interest rates to individuals (Bonnette, 2005). This is unlike the traditional lenders who required lots of details so as to lend money to their clients. In light to this argument, this essay shall attempt to evaluate if the pay day lenders should have their businesses regulated or not. 2.0. Pay day lenders should be regulated As seen in the work of Vega (2014), pay day lenders subject their borrowers to misery. This is from the verity that they ask for very high interest rates to desperate individuals who wish to sort out their financial issues with immediacy. One would argue that these pay day lenders are simply on the move to make huge amounts of profit by frustrating poor individuals who lack better alternatives to their present situations. In fact, the Perry (2011) and Cresswell (2009) refer to the pay day lenders as the worst offenders that the society can breed. However, the pay day lenders defend their mission by arguing that they save situations that cannot get assistance from the traditional lenders (Vega 2014; Jefferson, 2012.). They also argue that their services are better as they prevent borrowers from yearly interest rates that are high and may rise to 400% (Vega, 2014). The most interesting part, though, is that more and more people are caught up with this system with the day. Pay day loan companies should be regulated by the government as they offer extremely high interest rates to their clients. As argued by Cackley (2011) in an event that the pay day companies are regulated, it will be easy for regulation to take place as the government will ask for a clear range of the interest rates payable by the clients. This means that the pay day companies will only deal with persons can handle the rates and the debts that they will manage to pay at the situated time frame. In this depiction, it is perceptible that the individuals doing business with the pay day companies will be sure that they enter into deals that they can afford and will manage any form of encounter that will ensue from their failure to pay the fee required. The government should regulate the pay day companies so as they can audit the same like any other institutions. Cackley (2011) says that this will allow the government scrutinize if these companies are indeed validated to conduct their businesses or not. This will result to the government conducting a research on the whether the creditors offered meet the required criteria and if the government can accept their terms of service and operation. This means that the regulation will protect the citizens from exploitation from these companies that may not be operating on friendly terms of service. Regulation of the pay day companies means that the companies will work under specific rules and regulations from the federal government. Edmonds (2014) says that regulation sets the parameters that will suit the needs of the contemporary client. In the argument presented by BBC news (2013), the pay day loan companies will constantly be accused of high debts. This explains why there has been need to bring the lenders to a discussion on why the lenders need to change their way of conducting business. There have been appeals for the administration to save the clients from the intoxicated market full of the lenders. The news also explains that the need for rules to regulate these companies is mandatory (BBC news, 2013). This not only relates to the lending of money but also the number of times they advertise their service. The unfair competition is yet another reason that validates the regulation of the pay day companies. The Office of Fair Trading  (OFT) argues that it is extremely difficult to trace these companies and the kind of competition they offer is not credited but one that operates under speed not costs on the client (BBC news, 2013). The unwarranted charges have seen the companies acquire about a half of the profit from their business. The company’s slogans also portray immediate cash, an aspect that is questionable. Worse still, the UK records over 2 million persons accessing these services (BBC news, 2013). The cases of the debts increasing are likely not to decrease, yet the Consumer Finance Association is not ready to accept the government regulations cordially (BBC news, 2013). Edmonds (2014) argues that the current regulation requires the pay day loan companies to hold a license from the OFT. Through this, it is arguable that the company is regulated in a way that they work under conditions that will prevent the debtors from overexploitation. Failure to comply with regulation would lead to penalty that would cost £50, 000 and a revocation of their licenses (Edwards, 2014). This kind of regulation would indeed be vital for the operation of such companies, as well as to the well being of the consumers. Regulation of the pay day lending companies will reduce the growing of these companies withy the day. Wright (2011) writes that the lending companies are on the increase and stand at over 22,000 lending shoppers. The lending companies also keep mushrooming with the day and have even overtaken the ordinary shops. In line with this actuality, it is important that the shops are regulated so as to prevent them from turning the minute loans to millions of shillings. The author also relates this rise of companies to the relaxation of the government’s efforts toward regulating funding (Wright, 2011). The companies, therefore, took advantage and rushed to root themselves throughout the country. Regulation will for this fact, prevent this mushrooming of companies. Additionally, regulation of the pay day companies is useful as it will sort the issue of the banks inability to access the market. Wright (2011) argues that the banks have had lots of problems in an attempt to access the market. This is because lots of people prefer to get the speedy loans as opposed to the traditional loans. It is this verity that has led to institutions such as Wells Fargo to provide services like those of the pay day companies so as they can also get a portion of the target population in the market (Wright, 2011). From the report of the National People’s Action (2012), the working poor are the most affected by the pay day loans. The report records 16.2% of individuals who belong in under banked households using the services of the pay day loan companies (National People’s Action, 2012). This explains that the government has lost the persons of lower income to these companies. These individuals are likely to prefer the services offered by these companies as they need fast cash. This fronts the inquiry on whether the government has failed on its side in an attempt to ensure all persons regardless of their status access fast cash. However, the borrowers will continually pay for the services as they always need these monies for their emergency needs. The National People’s Action (2012) is of the view that the pay day companies found their way to the market as a result of the government not instituting consumer protection laws and regulations of the financial sector. With no federal regulation focusing on this financial aspect, the companies found their way to the market. It is then, not reasonable to blame the companies for their rapid response to the needs of the borrowers in the market. The battle between companies and the government is likely to augment as the companies are willing to invest much in fighting for their place in the market. This leads to the borrowers at the mercies of the regulations enacted either to their favor or the companies. Regulation of the pay day companies is validated as these companies do not share data as expected of them (Parliament, 2013). As seen in the press release of OFT (2013), the pay lenders were given a timeline to change their way of doing business. This explains that there are numerous hitches in the business conducted by these individuals. The release goes on to give a stern warning that these who do not comply with the rules are likely to lose their licenses with immediacy. The release is also wary of the fact that a great percentage of these companies fail to comply with the rules and that most of them do not observe the standard set for operation (OFT, 2013). With this in mind, it is warranted to support the argument that the pay day loan companies need to be regulated. One would also question the reason behind these companies failure to comply with the law despite numerous attempts by the government to enforce its rules on them. In line with this argument, the pay day loan companies need to be regulated. Parliament (2013) agrees with this fact as they believe that regulation is a change that the society is waiting for. 3.0. Pay day lenders should not be regulated In the thought of Wright (2011), the pay day companies have acted as watchdogs to the government for a long time. In the event that they are regulated, it means that the government will not do much to help the ordinary citizens in terms of accessing loans as they wish. The traditional lenders have led to some individuals failing to access the cash they want due to numerous regulations that have been sort out by the pay day lenders. With the advent of the pay day companies the financial industry has moving with a high speed as the demand for services is extremely high. It is this facet that has led to the regulation of the amount of money an individual can acquire and at which time frame. It is warranted to indicate that these companies have been instrumental in putting the government on its toes in terms of its contribution in the financial industry. On another view point, one would argue that the pay day companies need not be regulated as they have acted as an avenue for easy access of funds to individuals with need. A good example is an individual who needs cash for medical treatment and cannot access a loan the traditional way. Such persons would actually benefit from the services offered by the pay day companies. 4.0. Conclusion From the paper, it is patent that the pay day companies need to be regulated. The companies have recorded the shortcoming that they are simply out to make money and not to help its clients. The interests charged by these companies are indeed very high and only regulation will save the common citizen from exploitation of this kind. As seen in the essay, the argument is validated as these companies do not welcome the regulation rules kindly as they are sure that the businesses they conducted are free and advantageous to their clients. It is, therefore, recommended that government put more stringent measures on these companies so as to save its clients from overexploitation as well as prevent the situation that some individuals may get too much money whilst other too little. References BBC News, 2013. “Payday loans need tighter regulation ahead of summit” BBC News, 30 June 2013. Bonnette, O., 2005. Get What Belongs to You. London: Xulon. Cackley, A., 2011. Payday Lending: Federal Law Enforcement Uses a MultiLayered Approach to Identify Employees in Financial Distress. London: DIANE Publishing. Citizens Advice Bureaux, 2014. Backbench business debate on payday loan companies file:///C:/Users/user/Downloads/citizens_advice_briefing_on_payday_loan_companies_20_january_2014.pdf Cresswell, P., 2009. Totally Debt Free Lifestyle. NY: Lulu.com. Edmonds, T., 2014. Payday loans: regulatory reform. Retrieved from: file:///C:/Users/user/Downloads/SN06676.pdf Jefferson, P., 2012. The Oxford Handbook of the Economics of Poverty. Oxford: Oxford University Press. National People’s Action, 2012. Profiting from poverty. Retrieved from: http://npa-us.org/files/images/profiting_from_poverty_npa_payday_loan_report_jan_2012_0.pdf OFT, 2013. OFT acts against leading payday lenders and proposes to refer the sector to Competition Commission. Retrieved from: http://www.oft.gov.uk/news-and-updates/press/2013/20-13#.U1Y90VVdWNC  Parliament, 2013.Payday Loans - Business, Innovation and Skills Committee. Retrieved from: http://www.publications.parliament.uk/pa/cm201314/cmselect/cmbis/789/78903.htm Perry, S., 2011. When Payday Loans Go Wrong. London: Pneuma Springs Publishing. Vega, J., 2014. Should Payday Loans be Regulated? Political Blogs. April 17, 2014. Wright, K., 2011. Bad Credit: How Payday Lenders Evade Regulation. The Nation, April 6, 2011. Read More