The future of fast loans will be affected by new rules
Strong voices have been raised in recent years to regulate the market for fast loans more strictly. Investigations and dialogues opened a few years ago in an investigation that subsequently became a bill on so-called high – cost credits. After a quick treatment in committees and the Good Finance, the Good Finance decided in May to introduce legislation on how high-cost credits may be designed and marketed to reduce the risks to consumers.
It is September 1, 2018, that changes in, above all, the Consumer Credit Act will come into force. The effect is that lenders must respect both interest rate ceilings and cost ceilings for fast loans and similar loans. In addition, all marketing of loans with higher interest rates must be marketed with the stamp high cost credit.
The new law in summary
- The amendments to the Consumer Credit Act are mainly concerned with four things, namely:
- Introduction of the concept of high-cost credit
- Introduction of interest rate ceiling for loans
- Introduction of cost cap for total loan cost
- Tightening the requirement of moderation in marketing.
High cost credits – what is it?
A high-cost credit is, by definition, a loan or credit with an effective interest rate that exceeds 30 percentage points above the reference rate (which is currently just over 0%). A loan that has an effective interest rate of 35% per annum is thus considered a high-cost credit according to the law. For example, a credit interest rate of 20% on a credit card is not a high-cost credit.
Interest rate ceiling
An effective interest rate that exceeds 30% (above the reference rate) can be said to be the “floor” itself for a high-cost credit. The law also stipulates a “ceiling” and that ceiling is 40 percentage points above the reference rate. In the total interest rate, any delay interest shall be included.
The term cost ceiling means that the total cost of a credit, such as a fast loan, must not exceed the loan amount itself. The catalog of costs includes interest and fees, interest on late payments and collection costs.
Example: A loan of USD 5000 may cost a maximum of USD 4999 with all possible costs included.
Moderation in marketing
For all marketing, the sender must observe a measure of moderation. This is especially true for products and services that are aimed at consumers and are of a more sensitive nature. The new legislation tightens the requirement for moderation in marketing for those who offer fast loans and other credits with relatively high costs. The legislator has even gone so far as to compel the lender to basically provide his loans with a “warning text”.
In all marketing of high-cost credits, the trader must firstly state that the offer applies to a high-cost credit, and partly describe risks with over-indebtedness and state where the borrower can turn to for support. These rules should be supplemented by a regulation (probably via the Consumer Agency). This means that everything is not clear as per the publication of this article.
Why has Parliament made the changes?
The Consumer Agency, with several authorities and consumer organizations, has long been critical of fast loans and other similar credits. It has been argued that the loans put economically weak people in even more difficult situations. This has been heard by the politicians who believe that consumer protection in the area has been neglected for a long time.
It is clear that the number of cases at Kronofogden due to unpaid fast loans has increased in recent years. It is also obvious that those who take sms loans generally have a weaker economy. It is primarily to protect the already indebted and those who run the risk of ending up in excess debt which the Good Finance has pushed through the law. More information on the reasons can be found in the bill Interest rate ceiling and other measures in the market for fast loans and other high cost credits , which you can find here.