Interest rate ceiling for sms loans – so it went in Finland.
As we wrote earlier, in our article on how to tighten the fast-loan industry, it is very possible that the sms will receive a 40% plus interest rate cap if the new rules are introduced on September 1, 2018. The only question is how this reform will in effect affect the sms industry and sms loans if introduced.
Of course, we do not have a crystal ball to look at, but we can instead look at Finland which introduced a 50% interest rate ceiling plus the reference rate for sms loans, or fast loans which they are most commonly called in Finland, in 2013. The Good Finance interest rate ceiling had exactly the same purpose as it did. As proposed in the study Strengthened consumer protection in the market for high-cost credits, thus it should only apply to high-cost credits with a short repayment period, ie sms loans.
This is how the investigative group defines sms loans
But what counts as a sms loan or a fast loan for the investigation team? Well, a credit that has the following ingredients:
- An amount not exceeding USD 20000.
- A maturity of 1 – 10 months.
- A credit that has a high effective interest rate, from 100 to several thousand percent.
Okay, so it is the criteria for sms loans according to the Swedish investigation that in many and many resembles the Good Finance which aimed for loans under 2000 USD. Clearly, Sweden has long been looking at Finland and has been greatly inspired by the laws on fast loans introduced in Finland in 2013, this can be clearly seen in the investigation.
The Good Finance model
The reason why Finland is used as one of the role models is that the loan volumes of the sms were substantially reduced when the interest rate ceiling was lowered and certain other rules were introduced in 2013. But in the Swedish investigation material (Chapter 10.4.2) it can also be seen that the loan volumes for the third quarter 2015 were back at almost the same level as before the new rules were introduced. However, borrowing costs for borrowers have remained much lower than before, which is obviously positive. Therefore, the Swedish investigation team probably thought that Finland was still a pretty good role model.
Fewer sms loans in Finland – but debt is still increasing
Just a few weeks before the inquiry presented its proposals for measures against sms loans, Good Finance newspapers began to report that a new law is in progress because sms loans from 2013 had not given the desired effect.
Prior to the 2013 reform, there were about 80 fast-loan companies, of which 36 were liquidated in 2013 as a result of the new rules, and loan volumes also went down drastically, as we mentioned earlier. But as I said, already in 2015, loan volumes turned up again and today there are 50 – 60 registered lenders offering fast loans.
If you want to mention something positive with the previous system, people took loans from one company and paid the costs with a loan from another company. The situation quickly became acute and people sought help at an earlier stage.
At present, people are seeking help in a situation where the debts are already large and difficult to arrange.
The interest rate ceiling, which was only aimed at sms loans, thus did not get the debt in Finland that much better. Now people are instead having bigger loans that they cannot pay off because it has become more difficult to get a regular sms loan. The number of people experiencing payment problems is constantly increasing in Finland. In June 2016, 370,000 Good Finance had payment difficulties. People who want to borrow nevertheless, so to speak, and the problems are only growing despite the fact that fewer Good Finance take quick loans.
Lenders utilize loopholes in the law
Not only that, many fast loan companies have also found loopholes in the law. Nowadays there are many sms loans that are formally at USD 20000 but where the borrower only uses a small part of the loan and then the lender can still set any interest rate. Now Finland seems to want to fix this by setting an interest rate ceiling that applies to all loans, regardless of size.
How will it go in Sweden?
It is far from impossible that much the same could happen in Sweden if an interest rate cap is introduced in 2018. There will be loopholes here as well and many private individuals who choose not to take typical sms loans will probably take larger loans that have an interest rate of 40% and a longer payback period, which doesn’t have to be that much cheaper.
This allows us to draw two conclusions:
- The sms will remain even if the lenders become fewer. Maybe there will also be loans here that are formally worth USD 20,001, but which in practice are smaller.
- Many lenders will offer loans with 10 months and one day maturity with loan amounts from USD 20,001. The interest rate will be slightly above 40% and it is these loans many will take instead of classic sms loans. Then many who just wanted to borrow maybe 5,000 USD will borrow 20001 USD instead and become more indebted than they otherwise would have been.
So what should you do instead?
We at Lite Bank believe that there are two different solutions to the problems we just mentioned.
If you absolutely want to introduce an interest rate ceiling to stifle sms loans, you should introduce a general interest rate ceiling that applies to all loans and all other credits instead. This avoids the Good Finance loophole, but unfortunately it does not necessarily reduce debt due to loans.
A better solution would be to ignore the interest rate ceiling and tighten the requirements on creditors’ credit assessments instead. It is not unreasonable to pay maybe USD 500 – 800 for a sms loan of USD 5000 even though the effective interest rate will then be high, the important thing is to make sure that those who are granted a loan really have a sufficiently good ability to pay.
Yes, we write “ability to pay” instead of “creditworthiness” because we believe that it is the moment that matters, not the history that the creditworthiness assessment also takes into account. We think it is perfectly okay to apply for a sms loan with payment note if you are debt free and have a sufficiently good ability to pay and an organized economy today.
Lite Bank does not want to claim that the new investigative proposals are toothless, but we obviously do not believe that they will suffice, and in addition, we think that an interest rate ceiling that only affects sms loans is based on a misconception. However, many other proposals make sense, not least the proposal for a cost ceiling. This proposal means that no high-cost credit may be more expensive than the amount that the loan itself is on, but in this case it should apply to all loans that do not require any collateral, even account loans that can also be cruelly expensive.