Criticism of fast loans
The criticism of fast loans has been harsh since SMS loans entered the Swedish market in 2006. These criticisms have sometimes been exaggerated but sometimes also justified. Now, the fast-loan industry is facing a major change, which is primarily aimed at strengthening the security of borrowers. What does the new law mean and what changes can you as a borrower expect? They was going through the new fast loan law and what it brings into the high-cost credit market.
SMS loans are often referred to as the black sheep in the loan industry. Although there are aspects of fast loans that can rightly be criticized, however, much of the criticism is unjustified. The biggest argument for those who oppose these high-cost credits is usually the high effective interest rate.
Read more here to understand why the effective interest rate gives a misleading picture of the cost of a fast loan.
One argument, however, is justified is that some fast loan companies have previously been a little too generous in approving loan applications. This has meant that borrowers with low credit ratings, which sometimes have already been heavily indebted, still have their loan applications approved .
Borrowing with debt in itself does not have to be a negative thing, but you should always be aware of the stress that a loan creates on your finances, which should now be easier with the change of law.
To counteract this, the government earlier this year submitted a proposal for amendments to the Consumer Credit Act to create safer SMS loans and a safer market for you as a borrower. This proposal has now been approved by the Rigdaks and on September 1, the new law comes into force, which creates more security for borrowers.
On January 18, 2018, the Government submitted a bill to Parliament, Bill 2017/18: 72 . The main content of the bill was that the government proposed a more responsible market for high-cost loans and fast loans. By first and foremost introducing an interest rate ceiling and a cost ceiling for this type of credit, the government wanted to increase the security of borrowers.
Consumers who often apply for fast loans are also the group that is also at greater risk of encountering difficulties with repayment. If you, as a borrower, have less financial margins or have previously had difficulties with repayments , you probably belong to the group of consumers that the government wanted to help with its bill.
The bill contained a number of proposals for amendments to the Consumer Credit Act to give this risk group and also other borrowers better conditions for online credit. This change in the law would result in fewer people taking debt by feeling compelled to take these expensive quick loans.
The new law, which will now come into force on September 1, 2018 , sets the stage for the long investigative work that has been going on since April 2015. The law will protect people from over-indebtedness and also place high demands on fast-bank companies and their marketing.
Here is a brief description of the proposals submitted by the Government to Parliament. The most important, the bill, was approved on May 2, 2018 while the eight motions were rejected. That in itself is no loss, as the most important improvements to the law are presented in the bill.
The Government’s proposal
- Bill 2017/18: 72 – Interest rate ceilings and other measures in the market for fast loans and other high-cost credits
What does the new law mean?
With the new amendment to the Consumer Credit Act, several changes will be made at the end of the month. Among other things, a cost ceiling is introduced and also an interest rate ceiling on SMS loans and high cost credits. The requirement to alert borrowers about the risks of expensive loans is also tightened so that fewer people are over-indebted through these simple loans.
Claims on the marketing of these loans are also tightened in the new law. Consumer credit under this regulation must be moderate and must not be designed to attract people to hasty and unthinkable decisions.
In terms of cost, you as a consumer benefit from this change of law. The cost ceiling introduced means that a loan must not cost more than 40 percentage points above the reference rate. This reference rate corresponds to a repo rate of the year, and is decided by the government each year just before Christmas.
The reference rate does not include any fees that may apply for the loan, such as notification fees or setup fees . In other words, this interest rate is nominal.
Something that is also a central regulation of the law change is that a loan must never cost more than the double sum of the loan amount. This adjustment includes both the interest rate and the repayments on the loan.
New loan cost
The new cost ceiling will thus make that the total cost of your loan or high cost credit should never exceed 100% of the total loan amount . If you take out a loan of SEK 10,000, for example, you should never have to repay more than SEK 20,000 in total. This includes fees, interest rates and any collection fees and more.
Also worth noting is that this is only applied for high-cost credits. Therefore, if the loan has a lower effective interest rate than 30 percent , it will not be classified as high-cost credit and therefore not regulated by the new law change.
Thus, the cost of capital for private loans is not included in the change in the law and can therefore still have a capital cost that is significantly higher.
What loans are affected by the law change?
In other words, the new law applies only to fast loans, online loans and high-cost consumer loans. The criteria for this is that it should be a loan without collateral and have an effective interest rate of at least 30% in addition to the reference rate.
This means that other loans, such as mortgages, are not included in the law change. Nor are credit cards covered by the new legislation.
Disadvantages of the new law
This upcoming law change has been known in detail since the decision was made on May 2 this year, but as the investigation has been going on for several years, it has been known that a change stood for the door. Because of this, several fast-loan companies have recently taken this step into account, which is a positive thing, of course. For you as a consumer, however, there is a risk of some minor disadvantages now that the law comes into force.
In the past, fast loans have been tightly regulated and therefore, among other things, have been very clear about going out with the total cost of the loan, which fees will be charged and such. Regardless of what you consider about sms loans and high cost credits, they fulfill a great function for the consumers who need to use them and borrow money quickly in unforeseen events.
Now that the lenders have raised their heads for the new law, in many places it has meant that several players have converted their fast loans to online loans . The disadvantage of this is precisely the fact that it becomes much more difficult to know in advance what a credit will cost in the end compared to a micro loan where you directly get the total cost of the loan presented to you.
Since Sweden is facing a choice of less than 2 weeks, it may of course be of interest to know where the various parties were on the issue of fast loans. Finally, here follows a brief summary of what the Rigdaks’s various parties thought of Bill 2017/2018: 72 “Interest rates and other measures in the market for fast loans and other high-cost credits” in their speeches.