There will be no direct effect on the effective interest rate cap on the credits granted. However, there is an indirect change in the law to the extent that it is worthwhile competing for existing credit, especially now that the credit market is in turmoil. By competing, the cost of credit paid by the consumer can be much lower than the current credit agreement.
For a moment, if all the loans were placed under the same interest rate ceiling, one would imagine that the differences in the cost of the loans would disappear and the importance of loan tendering would diminish?
The importance of competing for loans
And financial products is only growing. Even today, it is not easy for the consumer to predict how financing will be most advantageous. After the law change, this becomes an even more difficult question. Already a percentage difference in the interest margin usually means a difference of hundreds of euros in the total cost of the loan.
With banks and finance companies now getting even more on the same line in terms of pricing, it is almost impossible for the consumer to compete with dozens of different banks on their own for the most advantageous financing solution. Thus, we believe that this reform will be of benefit to both the consumer and the loan comparison companies, as the change in the law will increase price awareness on lending and make the cost of loans more consumer friendly.
It will also be easier for consumers to keep track of the total cost of their loans. In the past, the cost of borrowing was controlled by limiting the effective annual interest rate, a formula which is quite challenging for the average consumer. Now the real annual interest rate is no longer of equal importance, as the total annual cost of credit is capped at EUR 150 per annum and the nominal interest rate must not rise by more than 20%.
Finns are actively seeking financial assistance
For consumer loans and quick loans. How does a legal reform affect consumers accustomed to seeking high-interest rate quick lures?
After the 2013 legal reform, smaller players disappeared from the market, and I believe that the same trend will continue this time. Among the remaining players, we expect competition to intensify further. While this will open the door to cheaper access for some consumers, it will probably exclude some consumers from the credit market as creditors’ risk-taking capacity is reduced.
Interest rate caps are seen as having the greatest impact on the activities of financial companies operating on the Internet. Will the new interest rate cap also affect traditional banks?
Yes. Most banks also have to adjust their pricing to comply with new legislation. In addition, as a result of the change, online financial institutions are increasingly competing with traditional banks for the same customer segment. Already, we are seeing that applying for funding from our own bank is not necessarily the cheapest option, and we believe this trend will continue as some smaller players may lend at a lower cost to traditional banks due, among other things, to a lighter cost structure.
Can a change in law also affect the credit products available?
Yes you can. With lower interest rates, the profitability of small and short-term loans in particular will be quite modest from the lender’s point of view. For this reason, we believe that many lenders will shift the focus of their offering to larger and longer-term loans.
The cost of the lender’s own financing will play a decisive role in the future. If the cost of self-financing is not moderate, it will not be reasonable to extend credit to consumers.