The first batch of consumer finance companies were established eight years ago. Consumer finance companies play improve consumer living standards and support economic growth. However, several consumer finance companies suffer from high-interest rate borrowing problems. In order to find feasible solutions for the problem, Sunshine Research Center for Financial Innovation, THUIFR conducted research to find out the reasons for this issue and provided suggestions on regulatory supervision.
Reasons for high-interest rate borrowing
To pursue high profit, lenders tend to hide or misrepresent important loan information and fail to disclose all information that should be disclosed to the borrower in the contract. For example, some companies intentionally fail to disclose part of the commission or service charges, which results in borrowers not knowing the total cost of the loan. Some companies even deliberately confuse nominal interest rates with real interest rates to consumers. To address this issue, the loan pricing shown by consumer finance companies in the contract should be the nominal interest rate instead of the real interest rate. In addition, some companies use an inaccurate way to calculate repayment. Instead of calculating the interest on the actual remaining principal of each period, the interest is calculated on the full principal of each period. As a result, borrowers face high-interest rate borrowing.
The second reason for the problem of high interest rate borrowing, is that borrowers because are not equipped with qualified financial knowledge, attitudes and skills. Due to the lack of financial knowledge, borrowers do not consider undisclosed information. According to a study in 2014, about 75 percent of residents had no idea of compound interest. A 2017 research study showed that consumers were not familiar with knowledge of loans, investment and insurance. In terms of investment, approximately 10 percent of people did not read their contracts. Therefore, borrowers contribute to the high-interest rate borrowing problem.
Negative impacts of high-interest rate borrowing
The prevalence of high-interest rate borrowing by consumer finance companies is the reason for rising rates of overdue payments, because borrowers bear more loans than they can repay.
|
2014 |
2015 |
2016 |
2017 |
| Company A |
|
|
|
|
| The interest rate for loans over 1 day overdue (1-89 days) |
2.48% |
3.59% |
4.17% |
5.36% |
| The interest rate for loans over 90 day overdue (more than 90 days) |
1.55% |
2.51% |
3.06% |
2.81% |
|
| Company B |
|
|
|
|
| The interest rate for loans over 1 day overdue (1-89 days) |
6.21% |
8.17% |
8.19% |
9.38% |
| The interest rate for loans over 90 day overdue (more than 90 days) |
1.98% |
2.97% |
3.78% |
3.02% |
Table 1 Overdue Repayment Rates of Company A and B
According to Table 1, overdue repayment rates for companies A and B rose between 2014 and 2017. The interest rate for loans over one-day overdue of company A had increased from 2.48% in 2014 to 5.36% in 2017 and for company B grew from 6.21% to 9.38%.
Another impact is the disturbance of social security. With the increase in the overdue repayment rates, some consumer finance companies put pressure on borrowers via extreme violence to raise the repayment rate. Extreme violent methods include door-to-door harassment of borrowers and their families, making 24-hour harassing phone calls to colleagues and friends of the borrowers and fabricate facts to damage the borrower's reputation. These extreme violent behaviors have seriously disrupted social order and disturbed public order.
Suggestions for the problem
In order to resolve the above issues, it is important to create and maintain a normal, fair and transparent market.
It is essential to accelerate the establishment and continuous improvement of a mandatory information disclosure system. Information asymmetry is the direct reason of high-interest rate borrowing. Therefore, the system should include uniform disclosure of actual interest rates or internal rate of return, annual interest rate, each cost item as well as total costs. All the above items should be underlined or bold or enlarged in order to ensure that borrowers are familiar with risks with the contract.
The government should formulate a usury law and related regulations as soon as possible. At present, legislation on usury behavior of licensed lenders in China is still blank. To develop a feasible usury law, several factors should be considered. Firstly, consumer finance companies need to be licensed and brought under regulation. Secondly, the grey income zone from 24% to 36% should be defined as the illegal zone. Finally, violent loan collecting behaviour which have become a common phenomenon and seriously disturbed the social order should stopped. Therefore, loan interest rates of over 36% and violent loan collection behavior, should carried a criminal penalty.
China's financial consumer rights and interests protection system should be improved. Measures include the development of standards against inequity, fraud and abuse, improvement of the mechanism for handling complaints from financial consumers as well as the application of fintech in consumer finance lending supervision.
