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Students fall prey to shady online lenders
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NEWSPAPERS across China were filled recently with reports about the death of a university student named Zheng Xu.
Zheng was just 21 when he jumped to his death from a building in Qingdao, Shandong Province, in early March. The apparent reason behind his decision to commit suicide, according to a text message he reportedly sent to roommates before the fatal leap, was his failure to pay back more than 600,000 yuan (US$92,580) he owed in debts.
A college sophomore in his native province of Henan, Zheng’s alleged addiction to soccer betting led him into heavy debt with online lenders.
While gamblers typically have only themselves to blame for their financial woes, this tragedy has brought into the open the often insidious nature of China’s expanding online-lending industry. Perhaps most disconcerting is the fact that online lending platforms seem to have established a strong foothold on the campus.
Many of these platforms reportedly offer loans without conducting due-diligence procedures such as vetting applicants for their solvency or requiring collateral. For example, when Zheng applied for loans from exueqi.com, a website specializing in educational loans for cash-strapped students, he filled out the forms using a classmate’s identity. To obtain credit, Zheng did little more than enter his name, birth date, phone number, occupation, the purpose of borrowing.
What prudent financial institutions would regard as dangerously lax risk management appears to be a deliberate strategy to entrap gullible students.
The Beijing News reported recently that although these platforms often promise low interest rates, their loans are nowhere near as cheap as they look. Many charge hidden “service fees” that raise the cost of borrowing well above advertised interest rates.
Some of these lenders could even be accused of contractual fraud as they cunningly avoid notifying borrowers when their debts will come due. As such, delays in payment became an excuse for collecting exorbitant fees.
It would be going too far to describe all of these lenders as loan sharks intent on fleecing students, but the general lack of financial discretion found among Chinese students has made this population particularly vulnerable.
Following Zheng’s tragic death, a Beijing Youth Daily reporter downloaded the app of an online lender that primarily services students. In what looks like a leak of users’ information, the reporter came across several disclosures of reasons why applicants sought loans in the first place. These reasons included buying one’s girlfriend a new iPhone 6, and starting one’s own micro-business.
One could argue that these platforms prove their value by the number of start-up entrepreneurs who count amongst their borrowers. Nevertheless, it’s safe to assume that a good portion of the money they lend is used to satisfy material needs or flatter individual vanity, like in the case of the iPhone buyer.
The introduction of financial products and services into universities has long been dogged by controversy, with critics saying this phenomenon might lead to a spike in student loan defaults or encourage extravagant spending.
Supervision needed
For example, in 2004 national banking authorities gave the green light to credit card issuers to enter the campus market. The ensuing decade saw a host of cases in which desperate students with enormous credit card debts — nicknamed “card slaves” by commentators — either had to work outside school to repay their bills or turn to their parents for help.
The banking watchdog then issued a directive in 2009 barring banks from issuing credit cards to students under 18. And for students over 18, written consent from parents is required if they are to get their hands on a credit card.
A growing army of online peer-to-peer (P2P) lenders is thus tapping into the unmet demand for credit among students by offering dubious loans and products. In August, Beijing-based Renmin University of China released a study of Chinese college students’ credit habits. Out of approximately 50,000 respondents, 8.77 percent are in the habit of borrowing when they need money. Among them, 5.33 percent turn to micro credit firms, while the rest tend to borrow online, mainly from P2P operators.
In a tantalizing consumerist society, today’s generation of students has been ably assisted by these lenders in their tendency to spend beyond their means.
Myriad scams involving P2P operators making off with investors’ money over recent years have given the industry a bad name in China, which justifies stepped-up supervision of these sometimes shady outfits. Nonetheless, not enough attention is given to intensifying oversight on those operating on campuses, many of which are unscrupulous and rapacious in their usurious ways.
A CEO of a local P2P firm once told me that the key to discerning the risks of investing in a P2P is to check if it has a capital pool, which can allow it to manipulate investors’ money. Non-professional students may be befuddled by such jargon as capital pool or risk aversion, which only underscores the need for someone to watch their back. Otherwise, tragedies that befell Zheng, the Henan student, will likely reoccur.
It’s not fair to dismiss and discredit the entire P2P lending industry as a whole, but lenders who prey upon the weak and the unsuspecting should be driven from the ivory tower.
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