To protect consumers, state governments sometimes create laws that restrict the ability of creditors and debt collection agencies to aggressively demand payment of debts.
For example, a law might say a debt collection agency cannot go after a person’s retirement assets to pay back a loan.
While these laws are meant to make life better for consumers, they sometimes have unwanted side effects.
A new study from the Federal Reserve Bank of Philadelphia found tighter debt collection laws can hurt Americans by making it harder to get credit.
For this study, the head researcher looked at the trend around the country between new state restrictions on debt collection and the amount of credit available for consumers.
The researcher found on average each time a state passed a new restriction, revolving lines of credit in the state to fell by 2.2 percent.
“Tighter debt collection laws
can make it harder to get credit.”
This makes sense because if lenders are limited in how they can collect on debts, they will most likely end up losing more money on bad loans.
As a result, they would need to more careful on who they lend money to and would only take on safer applicants..
While it’s important to protect consumers from overly aggressive debt collection tactics, consumers also take a financial hit if they can’t borrow money in the first place.
Good legislation should find a balance between lenders and borrowers.
Source: insidearm.com. Photo source: simplelifereboot.com