Fast Credits: Easy Money for Customers or for the Firms?
|General information about the terms of providing fast credits||3|
|Barriers to entry and number of firms||8|
|Strategic marketing and advertisement||11|
|Reasons for regulations||12|
|Economic ways of regulations for fast loan industry||13|
The market of fast loans definitely needs some regulation because currently it has economic profits which are obtained from people who are so poor that are not able to return their debts. This means that the activity of fast loan companies increases income inequality: the poor become even poorer and the rich become richer. This may have negative effects such as alcoholism, increasing crime rate, more homeless people, and disunion of the whole society. If no restrictions are made by the government, the number of pay-day loan companies will increase, because there are real examples of firms who make annual profit larger than LVL 5 million while the annual license costs only LVL 10,000. New companies, as well as the old ones, will attract customers by different marketing campaigns and keep providing misleading information about the actual annual interest rate.
The market structure of fast loan market evolved from Stackelberg oligopoly. When the number of firms increased the firms started to behave so as to get customers from the competitors. As a result the interest rates went down till the level of marginal costs. Therefore, there is no point to impose pmax for the interest rate because the market has already reached Pareto efficient point with no deadweight loss. The government needs to impose another type of pmax which would prevent low-income population taking such loans from getting in a debt trap. The best options to take control of the situation would be to improve conditions of prolonging the rollover period or to set the price ceiling for fines for delayed payments. This will directly cut economic profits of fast loan companies, as well as prevent new companies from entry and new consumers from getting into a debt trap.
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