In order to better regulate sms loans and other high-cost credits, the government appointed an inquiry in April 2015. This led to a new consumer credit law that limits, inter alia, the level of interest rates, the total cost and the extent to which the loans may be marketed. The new law came into force in September 2018. Now a review has been made and in July 2019 a tightening of the rules will take place.
What counts as high-cost credits?
High cost credits are loans where the effective interest rate is at least 30% plus the reference rate. By the reference rate is meant the Riksbank’s policy rate, which was raised in May 2019 from -0.50% to -0.25%. This means that at the time of writing, a loan with an effective interest rate of at least 29.75% is a high cost credit.
The new law entails an interest rate cap on high-cost credits
One of the most important changes in the new law is an interest rate cap, which means that the lender may never charge a higher interest rate or interest rate than 40% plus the reference rate. At present it represents 39.75%.
In the past, effective interest rates of over 100% were common. Another purpose of the interest rate ceiling is to make lenders more cautious about granting credit loans. They no longer make the same amount of earnings on each individual loan and find it harder to cover any credit losses if they are too generous with their lending.
High-cost credits also have a cost cap
A major problem before the new law came into force was that credits had excessive fees. The cost ceiling means that interest rates and fees may not together constitute more than 100% of the original loan amount. Anyone who borrows SEK 10,000 should never have to repay more than SEK 20,000.
Under the cost ceiling, all credit costs, including interest on late payment and debt collection, are included. Lenders need to think extra when designing their loan products, as they cannot exceed the cost cap. Borrowers know that they will never have to repay more than twice as much as they borrowed.
Extension may only be done once
Before the changes in the Consumer Credit Act, a lender could offer a number of extensions and also charge a fee on each occasion. Now, a high-cost credit may only be extended once, but exceptions are made if the extension is offered completely free of charge.
If the borrower causes problems to repay, the purpose is for lenders and borrowers to jointly develop a repayment plan, instead of continuing with expensive extensions of the repayment period. It is also not possible to circumvent the law by offering a new credit to resolve ongoing credit, since it is also counted as an extension under the Consumer Credit Act.
Tighter rules regarding credit testing
Prior to the legislative changes, it was not uncommon to offer so-called ” free loans” which were short-term loans without any interest or fees. However, if the consumer did not handle the refund, charges could be levied. Now a credit check must always be done before a loan is granted, even in the special case of free loans.
Exactly how the credit check should go is not statutory. For example, the lender does not need to use UC, but they always have to do a test on the borrower’s repayment ability and count on having certain margins, especially if they already have other loans.
The warning triangle that must accompany the marketing of high-cost credits.
Since the new Consumer Credit Act came into force, one of the major stumbling blocks has been the rules of moderate marketing. In short, this means that a high-cost credit must be marketed in a balanced and factual way. The marketing must also not be intrusive or compulsory.
The problem is that it has been difficult to apply the rules in a practical way. Among other things, the uncertainty has been great in what can be regarded as moderate and many companies in the industry have seen it as a pure assessment issue.
Therefore, a tightening will take place on July 1, 2019, which means that high-cost credits should be marked with a warning triangle. On behalf of the Government, the Consumer Agency has pushed through the change and the main purpose is to draw the consumer’s attention to being offered a high-cost credit. The idea is to stop and think, and understand that it is an expensive credit.
What are the consequences of the new legislative changes?
Since the inquiry was set up, a general purpose has been to protect the consumer. With both an interest rate ceiling and a cost ceiling, it is no longer allowed to offer loans with unreasonably high interest rates or fees. The stricter rules regarding credit testing and loan extension also make it more difficult for the consumer to aggravate his or her own financial situation.
Once the cost cap is reached, a lender can no longer charge fees. One consequence is that the road to Kronofogden risks becoming shorter and faster, since credit companies do not learn to be interested in long-term payments if they have no opportunity to get paid during the process. At the same time, the government believes that the priority should be to quickly settle the debt ratio and put a stop to running costs before it goes too far for the consumer.