Have we not learned from the Credit Crunch?
There seem to be a host of new companies in Canada that have recently started operations in the 'community to community lending' space. For those not familiar with this type of business, it allows individuals to lend other individuals money at favourable interest rates for both the lender and borrower. The lender is able to earn a higher interest rate than they would in a 1 year GIC and the borrower is able to borrow money at a rate lower than what is given to them on their Mastercard and VISA cards.
While on the surface this sounds good and all and the fact that many of these companies do offer credit checks (I would hope) and do proper screening, it makes me wonder. Have we not learned from the credit crunch issues in the states?
Here's why I think this is troubling. First of all, Canadians have a record amount of debt. Folks! On average, we're saving less than we're spending. That would indicate why these person to person lenders are seeing a market - a market where nobody has any money. We're already stretched to the limit, should there really be more available credit for the average Canadian? This will only make the situation worse by encouraging Canadians to take on even more debt!
Second of all is risk. In my view, the slightly higher interest earned by the lender does not (in my opinion) make the lending a worth while venture. All it takes is for a bad borrower to slip through the cracks so to speak, and you'll be kissing your money away.
Last but not least, based on some of the reading I've been doing, it appears that this industry is still very much unregulated. This is very concerning for me. For anything that is investment grade (this isn't btw) I believe there should be some governing body to watch over.
Don't get me wrong, I'm a big fan of lenders and borrowers to help each other. For example microloans like Kiva in which people from developed nations help those that need microcredit. Like that woman in Azerbajain that needs some flour and wheat so that she can bake her bread etc etc. That is fine.
I'm more worried about credit tapped Canadians borrowing even more money. Did we not learn anything from the current credit crunch situation in the USA?
While on the surface this sounds good and all and the fact that many of these companies do offer credit checks (I would hope) and do proper screening, it makes me wonder. Have we not learned from the credit crunch issues in the states?
Here's why I think this is troubling. First of all, Canadians have a record amount of debt. Folks! On average, we're saving less than we're spending. That would indicate why these person to person lenders are seeing a market - a market where nobody has any money. We're already stretched to the limit, should there really be more available credit for the average Canadian? This will only make the situation worse by encouraging Canadians to take on even more debt!
Second of all is risk. In my view, the slightly higher interest earned by the lender does not (in my opinion) make the lending a worth while venture. All it takes is for a bad borrower to slip through the cracks so to speak, and you'll be kissing your money away.
Last but not least, based on some of the reading I've been doing, it appears that this industry is still very much unregulated. This is very concerning for me. For anything that is investment grade (this isn't btw) I believe there should be some governing body to watch over.
Don't get me wrong, I'm a big fan of lenders and borrowers to help each other. For example microloans like Kiva in which people from developed nations help those that need microcredit. Like that woman in Azerbajain that needs some flour and wheat so that she can bake her bread etc etc. That is fine.
I'm more worried about credit tapped Canadians borrowing even more money. Did we not learn anything from the current credit crunch situation in the USA?
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