Friday, December 16, 2011

Borrowing Christmas

“What are you getting your family and friends this Christmas?” At this time of the year, you must have heard this question at least a thousand of times! Whereas Christmas should be all about spending time with your family and friends and, for some, to revive their faith, nowadays the holiday’s emphasis is mostly laid on the material aspect.

With the global economy staggering, the ‘giving’ aspect of Christmas because more difficult. A financial times report stated that many Britons will take on more debt to fund their Christmas expenses. However, banks remain hesitant in lending money to lower income households. This creates a situation where people find their extra 300 pounds or so they need for their holiday gifts by going to a payday lender.

These types of short-term loans have increased significantly both in the UK as well as in USA, as households need some extra cash to pay for their monthly bills, or in some cases, to fund their Christmas expenses. When they receive their next months’ pay check, they then pay back their loan and, according to several sources, a 15 percent charge. Because these payday loans are most often for small amounts of money – usually only a couple 100 dollars – borrowers don’t often realise the huge rates they pay for it. However, if payday loans are rolled over, the annual interest rate for their loans can be extremely high. 

To give you an understanding of how important this phenomenon has become, the annual US payday market is 40 billion USD and the annual UK payday market is 2 billion pounds. While these practices have been in place for a while, this year new US firms were founded aimed to entering this large market. What Symbius and other companies are trying to do is deliver small loans through employers of companies to their low-wage workers. By working closely with employers these start-up firms can look into how much the employees earn and can assess whether a loan should be granted or not. The amount plus a (lower) charge will be deducted from their next pay-check. These charges are considerably lower than a payday lender’s charges, because they operate with lower costs.

The main issue for these start-ups is to convince companies of the benefit of this service. A potential benefit could be that there is less stress in the workplace because employees know that there is now a cheaper way to get that extra cash they need than going to a pay day lender.

However, from an ethical viewpoint, are these services encouraging people to get into more debt? Shouldn’t it be better to not provide any loans and let people be more conscious about their expenses? Your expenses this month will be more or less the same the next month, so if you have to borrow money to make this month, you probably also have to borrow for next month. Especially at this time of the year, wouldn’t you rather give your loved-ones a warm welcome to your house during the festivities and know you are able to make your bills in January, than take on a new loan to fund your gifts? 

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