Internet financial services offering small loans of 50,000 yuan or less to young adults are being utilized by an increasing number of students.
More than 60 percent of Chinese university students borrow money from online financial services to shop or travel, according to a survey by China University Media Union (CUMU).
As for the amount of the loans, nearly 41 percent of those polled borrowed less than 1,000 yuan, 40 percent borrowed 1,000-2,000 yuan and 5 percent borrowed more than 5,000 yuan.
Xinhua recently reported the story of one college junior in Shenyang, Liaoning province who owed as much as 50,000 yuan after borrowing from private loan providers to support his video game interest. He was forced to drop out of school to start working to pay off the debt with the help of his parents.
In late 2015, Chutian Metropolis Daily in Hubei province reported the story of one student who obtained a 30,000 yuan from several private loan platforms for personal consumption and later came to owe 700,000 yuan with interest.
Private Loan Market
In 2009, the China Banking Regulatory Commission (CBRC) banned domestic banks from offering credit cards and personal loans to students. The move left a significant opportunity for Internet financial companies to capture the market.
Employees at one private online loan company told Xinhua that students applying for loans only needed to provide their national ID card, student ID card and personal school roll information for the company to gauge their “credit worthiness.”
The company offered loans of 3,000 to 50,000 yuan. Yet information about the commission fee, cost of default and delayed repayment were suspiciously absent.
A market survey by the Legal Daily in 2015 found that the seemingly attractive interest rates in many private loan companies’ advertisements were a lie. Most charged a premium of 20 percent on the loan and some charged more than 24 percent interest, the legal ceiling for interest in private lending as set by the Supreme People’s Court last September.
Few student customers realize such penalties even exist.
Kang Jun, dean of the marketing department at Hunan University, called for more supervision and regulation of online finance, such as requiring providers to guarantee that students are properly informed about the loan’s terms and penalties.
For some banking insiders, the booming private online student loan business is reminiscent of the ‘credit card fever’ that swept Chinese campuses before the government ban a decade ago.
In 2002, China Merchants Bank issued its first credit card for college students. Since then, a growing number of students were lured to apply for credit cards: a wave of defaults soon followed.
In a report jointly released by Beijing Zhicheng Credit Service Company and the People’s University of China Credit Management and Research Center, more than 80 percent of college students said they never heard of individual credit reporting, and more than 30 percent were not aware of the influence an overdue record would have on their credit rating and future financial life.
China’s personal credit investigation system has a rather short history compared to some Western economies. It only records a person’s financial transactions with financial institutions. For a student who is neither going to buy a house nor apply for a credit card, a blemished credit history is no big deal, said an analyst on Bankrate.com.
US Private Student Loans
Forbes once listed eight common types of loans for students in the US to pay for college, one of which is private student loan offered by a private lender at an interest rate of 3-12 percent. Compared with the 20 percent or higher interest rates charged by most Chinese private loans providers, it is undoubtedly more efficient.
In terms of the application procedures, almost all private student loans in the US require undergraduates to have a credit-worthy cosigner.
There are also many private student loan consulting companies which help students to select the best loan product. For example, Simple Tuition offers a way to search for deals on private student loans. Some consultants also carry a College Loan Calculator to help students add up all of their college expense so as to determine how much to request from a lender.
The amount each student can borrow in private student loans each year is limited to the student’s school cost of attendance minus any financial aid he or she has already received. The amount a student can borrow will be determined by his or her credit history and, if applicable, that of the co-signer.
Universities’ financial aid departments play a part too. Private student loans, as a supplement of federal student loans, are introduced on many universities’ websites in detail.
“We advise you to only borrow what is truly needed to pay for qualified educational expenses. When borrowing to finance your education, you should give serious consideration to the loan amounts needed throughout your entire education.” the University of Mississippi wrote on its official website.