FI Analysis 22: Fewer high-cost short-term credits after new rules

2020-10-01 | Reports Consumer Bank

After the provisions regarding high-cost short-term credits were changed in 2018 – in part by introducing an interest rate ceiling and cost ceiling – these types of loans decreased sharply. It is probable that the reform has led to a decrease in the supply of high-cost short-term credits. It is also evident that several companies have stopped offering such loans.

High-cost short term credits are defined as unsecured loans with an effective rate that is at least 30 percentage points higher than a reference rate (based on the repo rate). These loans were previously called micro loans. They are normally between SEK 500 and SEK 20,000 and often have a short maturity.

To strengthen consumer protection and reduce the risks related to over-indebtedness, the Government introduced a number of measures to combat high-cost short-term credits – in part an interest rate ceiling for the nominal interest rate corresponding to the reference rate plus 40 percentage points and a cost ceiling limiting the total costs of the loan to the amount of the loan. The measures entered into force on 1 September 2018. This FI analysis presents an initial analysis of the reform.

All unsecured loans are not high-cost short-term credits. The total impact on new unsecured loans is therefore smaller than the impact on new high-cost loans. In total, new unsecured loans under SEK 50,000 have decreased by almost 25 per cent.