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Competitive practices could improve short term lending industry

Aug 05, 2013 Philip Burgess

When companies are deprived of competition, the chance for monopolization and other business practices harmful to the consumer arise. A varied field of services striving directly against each other forces organizations to provide customers and clients with the best product possible at the most affordable price. The entrance of new ideas and enterprises to a market can be particularly beneficial, as these factors have the potential to change the status quo.

Yet for many short term lenders, the governmental restrictions applied to their industry often inhibit new entrants from establishing a business, American Banker recently observed. It noted that eight states impose significant restrictions on short term lending, while another 14 ban the practice outright. The source suggested that the regulations as they exist now ineffectively manage interest rates while making it difficult for additional competition to break into the market.

The reason for these regulations is typically justified as consumer protection, but American Banker pointed out that similar practices, such as bank overdraft fees, receive less scrutiny.

The source wasn't entirely opposed to regulation, but recommended that a more uniform set of rules would encourage a competitive business environment. The current state-by-state, or sometimes town-by-town, rules don't always provide the protection they are supposed to. One Maine regulator told the source that online lenders can ignore many of the states' rules on short term loans.

Rather than regulating short term lenders, critics might try to out-compete them. According to a recent report from The Age, one Australian archbishop intends to contend with the industry by offering lower-interest loans. Rather than legislating the industry, he plans on offering an alternative kind of loan.