A recent Lending Club survey tells a sobering story about how those in financial distress are turning more and more to loans. People are relying more on their networks, friends and family. Over a quarter (26%) of respondents indicated they have borrowed money from family, and 15% have turned to friends to help make ends meet. This trend is part of an increasing dependence on informal networks to pay for basic necessities including groceries, gas and utility bills.
This widespread and irresponsible use of unlicensed lenders—also known as loan sharks—was revealed by the survey, which polled more than 4,000 participants. About 1.9 million adults sought out unofficial sources over the last year. This data point is featured in a share of 73% of respondents noting that as an increasing trend. This deeply concerning new trend highlights the potential dangers of lending to borrowers under the auspices of unregulated actors.
Borrowing from Unlicensed Lenders
Too many people in need of fast money end up doing business with illegal lenders, usually without knowing they’re putting themselves at risk. These lenders typically offer loans on verbal agreements, such as, “I’ll lend you £200, can you pay £50 a month back starting next payday?” The lack of written contracts or receipts puts borrowers at risk.
Just as loan sharks seem friendly at first, they’ll turn to more aggressive tactics when it comes time to repay. Borrowers are often forced to make payments on burdensome interest or take out additional loans to pay for current obligations. This vicious cycle can rapidly snowball into escalating economic despair.
“Loan sharks operate illegally without authorisation from the Financial Conduct Authority. They often appear friendly at first but can quickly become aggressive if repayments are missed. Borrowers may be pressured into paying high interest or taking on further loans to cover existing ones, leading to spiraling debt.”
Financial Consequences of Small Loans
Additionally, the survey found that over 50 percent of loans reported were for less than £250 at a time. This indicates that millions of people are taking out short-term loans just to make ends meet. A payday advance of only £50 can rapidly turn into over £3000 in repayments. This punitive practice can, in turn, entrap borrowers in increasingly more dangerous financial straits indefinitely.
4% of respondents reported being charged interest on their loans. Additionally, 16% of borrowers from friends said they paid interest on the funds they borrowed. Eight percent of people who borrowed from family racked up additional expenses. This practice hampers collaboration and can breed misunderstanding and even ill will among all parties.
The Impact on Families and Income Levels
The borrowing implications go far beyond the person borrowing. Over 60% of loan applicants from these lenders without a license were parents. This is a clear sign that financial stress is weighing heavily on families. Alarmingly, more than a third of these borrowers have monthly incomes in excess of £3,200. This makes it clear that not all families, even at moderate incomes, can afford to make ends meet appropriately.
Colletta Smith reminds us how important truth is when it comes to lending money to friends and family. She highlights the importance of transparency during these events.
“Kindness and money can work together, but only when there’s honesty, structure and communication.” – Colletta Smith
