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How Irresponsible Lending Is Fueling A New Crisis

September 15, 2020 | 3 Minute Read

If you ask most financial experts, they will all regard consumer credit insurance (CCI) as a rubbish insurance or junk insurance and as far as they are concerned, CCI could very well be shaping how next financial scandal. This is because CCI is an add-on insurance sold at the time a consumer is buying another credit contract. Simply put, a policy that you simply do not need or cannot claim for death, disability or unemployment. You may wonder how this affects people in general and the answer is simple: with millions of wrongfully sold claims out there, it makes it harder for other people to get a loan. In recent years, financial institutions have been forced to refund their customers billions of dollars resulting in plummeting losses for them. Companies such as Get My Refund have popped up in recent years to offer assistance with irresponsible lending refunds.

Bad debt was largely blamed for the 2009 global financial crisis and unfortunately, we are following in the same trends today Financial institutions are lending money without doing the needed affordability checks on the potential borrowers leading to large amounts being loaned out to people who can hardly afford what they take out. While taking risks is a quality greatly admired in business, excessive risk-taking could slowly be our undoing. For many people the 2009 crash is still a fresh memory and understandably, investors are rather cautious when it comes to making financial decisions. However, if we look at the statistics, the market is already unstable. In most parts of the world, buying a house is actually not as easy as it used to be because property values are once again sky rocketing. this means that offloading said properties is also not as easy as it once was.

The root of the problem is way CCI and gap insurance is sold. A common problem with commission-driven sales is the fact that people hardly ever seem to notice that agents are actually taking advantage of them. It is no wonder that mis-selling and skewed enticements thrive in the lending sector.

Another thing most financial experts have noticed is that customers hardly ever read the fine print or the disclosure statements in the contracts they sign. Years of customers accepting a product at face value have made lenders become bold in how they misrepresent products to potential consumers. Basically, it is a never-ending cycle.

In a perfect world, lenders would only grant credit to consumers who could later repay it without any difficulties and when the product suits the consumes' needs. In theory, the lenders would be acting on the consumers' interests but in practice, the lenders and consumers' interest do not always coincide. Financial enticements may be the inspiration upon which lenders act but expecting a high return when the consumers are at high risk of suffering a substantial detriment is definitely not the way to go.

The only way for financial institutions to avoid yet another financial crash is mainly by responsible lending. This can only be done by first of all obtaining a potential customer's information on their financial situation. This includes the potential customer's income an non-discretionary expenditures. The second thing to do is judging the potential customer's creditworthiness and only after doing so can a lender decide on the customer's credit application.

To be responsible lenders, a creditor should not make a choice on whether to give a loan based on what assets the applicant has. By doing so, you are only setting yourself and the borrower up for failure.