WHY DO MANY FACTORY WORKERS STILL STICK THEIR NECK OUT FOR UNSECURED LOANS FROM FINANCE COMPANIES?

Unsecured loans, especially from finance companies, have been proven to be full of risks such as, high interest rate, no-contract deals, and obscure ways of calculating interest. In spite of these red flags, the majority of factory workers still favor this form of money loaning.

Many factory workers still stick their neck out for unsecured loans from finance companies. Photo by Hai Nguyen

Throwing cautions to the winds

Although most workers are aware of the looming troubles and uncertainties coming from unsecured loans, they are still willing to shake hands with unauthorized lenders - a surprising fact pointed out by researchers from HCMUSSH’s Center for Vietnamese and Southeast Asian Studies (CVSEAS). 

In “The Current State of Credit Loan and Its Impacts on Factory Workers in Southern Provinces”, Dr. Tran Dinh Lam reveals alarming data concerning loans made by workers who are in short of money. According to the survey conducted on factory workers across 7 Southern provinces, up to 98,7% of workers admitted that their daily spending comes from  borrowed money.

However, in the last 5 years, only about 8.7% to 10% of workers decided to apply for mortgage and unsecured loans from banks. Instead, 71.3% looked for help from finance companies. On average, each worker made 1 to 4 deals with those companies; there are only about 5% that borrowed lesser than 10 million Vietnam Dong, yet, a whopping 95% of workers got themselves 10 to 80 millions worth of debts; in those 95%, loans from 50 to 80 millions amount to 27.7%. 

The survey also shows that up to 76.6% of debtors spent the money on daily activities, education and home repair. The rest used their temporary wealth to help their parents, pay up previous debts, medical bills, or run small businesses. 

According to Dr. Lam, lengthy and complicated procedures are what hinder workers from approaching banks for financial support, not to mention the lack of real properties to be used as collateral. Finance companies, on the other hand, offer an easier “way out” that promises not just anonymity, but simpler and faster procedures, and requires neither collateral nor extra fees.  

What worth noting is that all of the workers are aware of the risks which follow unsecured loans such as, no-contract deal, high penalty interest, fixed contract time purposely set to force debtors to pay interest as long as possible. Even worse, more than 90% of workers admitted that they have no idea how interest works.

Dr. Thoi - one of the researchers, states that it is not a sole factor but a combination of factors including social capital, cultural capital, economic capital  needs, and lifestyle that borns the trend of borrowing from finance companies. These factors continue to change and contribute to said trend. Due to low income, little to no savings, no properties to be used as collateral, Dr. Thoi adds, most financially struggling workers' only hope is unsecured loans.

Helping workers who cornered themselves with shady deals

As previously mentioned, workers who are struggling financially will often disregard risks and clutch at any straw in their reach, in other words, they are willing to make shady deals. In order to deal with unsecured loans made in desperation, there needs to be a policy that would grant workers easy access to bank loans, Dr. Lam states. Moreover, the interest rate ceiling needs to be kept in check since, in extreme cases, some finance companies insisted on annual interest rates as high as 70%.

The researchers also suggest that not only State’s policies but faster and more flexible money-lending procedures would also help those in need of money. As for businesses, they need to make sure that their employees are well paid, provide in-house loans, if possible, and pledge for their employees whenever any of them need to borrow from the bank. In addition, social services and associations need to put in real efforts to help workers,

Dr. Lam believes that if businesses and associations pay more attention to workers’ needs, are willing to take responsibility, and become more reliable, unsecured loans won’t pose much of a problem in the future.

An English adaptation of “Biết nguy hiểm, vì sao công nhân vẫn vay tiền từ công ty tài chính?” - Huyen Nguyen, Lao Dong News.

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