Effects On The Credit Due To Creditor Remedy Restrictions In The Debt Laws

Whenever a change is made in the debt laws it inevitably results in the rise of the interest rates. This is even more profound when creditors’ remedies are restricted in particular. The few significant effects of such remedy restrictions are as follows:

• Such remedy restrictions per se however does not have any significant negative effect on the credit use by the consumers in general. Evidently, it is seen that the consumer demand increases significantly due to such restrictions thereby ensuring that the total credit use does not fall substantially even if these is a significant rise in the rates of interest.
• However, when the rate ceilings are restricted it cannot rise when the creditors’ remedies are reduced. Therefore, if the creditor remedy restrictions results in an increase in the supply curve, it will result in a reduction in the credit availability overall. As a result, it is found and not surprisingly that credit use reduces significantly when both rate ceilings and creditors’ remedies are highly restrictive.
• Consequently, it is also seen that the creditor remedy restrictions results in such rise in the supply curve for credit especially on the riskiest types of debts. If you consider the rate differentials then such difference and effects will be more evident. As a matter of fact, the riskier customers are therefore more likely to obtain riskier types of debts.

As a result of these remedies restrictions, several studies were conducted that showed different results such as:

• It showed that the riskiest members are 40% more likely to face the effects of the credit risk distribution.
• This will reduce the average debt use per family unit much below the predicted level.
• Studies also showed the significant effects of the high standard deviations that are rendered by the remedy restrictions.
• However, it is possible to offset these effects with a rise in the rate of interest or by reducing the average credit use.
• In addition to that, the studies helped in analyzing the overall regression equation analysis of the total credit use per family which seemed to different from one state to another.

The researchers concluded that these effects are the sure shot results of the rate ceilings that allow more of the high risk customers to be accommodated. They are highly likely to get a loan even at a higher cost from any traditional banks or any other financial institutions and even other reliable online sources such as the likes of Nationaldebtreliefprograms.com.

Summary of the facts and findings

Theoretically, rate ceilings and restrictions on creditors’ remedies can influence both the supply and demand for debt to the consumer. When the data obtained from different creditors of different states are analyzed it revealed a few significant systematic differences that existed in the credit behavior of the respective creditors when all these were subjected to different credit laws.

According to the analysis it was found that:

• The restrictive rate ceilings reduce the consumer loan rates effectively but on the other hand the restrictive creditors’ remedies resulted in an elevated consumer loan rates. Moreover, such rate increases due to remedy restrictions appear to be the most on the riskiest types of loans.
• The restrictive rate ceilings are also associated with the reduced loan value ratios as well as increased down payments on loans. On the other hand, restrictive creditors’ remedies have very little or no systematic effect on the down payments.
• Restrictive rate ceilings also tend to inflate the minimum size of personal loans or any unsecured loans that a consumer can obtain while on the other side the restrictive creditors’ remedies ostensibly have opposite effects.
• The restrictive rate ceilings can cause the creditors to prefer credit obtained indirectly to direct credit because these credits can be discounted. The retailers can also raise the prices on consumer goods as well. On the contrary, the restrictive creditors’ remedies can cause a few creditors to favor indirect credit especially in the situations when the retailer absorbs a major part of the risk.

The credit law restrictions have had significant systematic effects on different areas of credit as well such as:

• Credit portfolio composition
• Credit rejections and
• The credit insurance use.

These effects were not found in the simple models that did not have such restrictions. However, there are also several other factors that affects credit as well such as:

• The geographic location
• The legal maximum insurance premiums
• The loan rates available on different types of credit instruments and
• Familiarity of the creditors with use of credit instruments or their ability to use them.

All these factors will also affect the behavior of the customers as much as it will affect credit or even more than the credit laws.

On the other hand, if the restrictive rate ceilings are very high then it may even eliminate a major portion of the consumer lenders entirely from the credit markets. More in particular, it may lead to a specific situation where no consumer finance companies will be able to operate without imposing higher reserve requirements as well as more restrictive recourse agreements than they could before.

This will be the effect that will be experienced even by those creditors who may specialize in providing comparatively high risk and small personal loans.

Integrated conclusion

The functioning of the lending institutions especially the commercial banks have changed due to such restrictions and rate ceilings. They can now make significantly larger volume of minimum size cash loans. Moreover, the credit unions also tend to follow their suit in making such loans.

However, in states that does not practice these rate ceilings and remedy restrictions or have a very low rate ceilings, the consumers find it difficult to obtain such small cash loans. This has set the platform for the alternative lending sources such as the pawn brokers to come up to fill in the gap between demand and supply of these loans and flourish.

However, consumers should be very careful while taking loans from them as they do have this special ability to under appraise collateral value systematically to which the debt laws have no control.