50 % discount on the washing machine, 20 % on car purchases, Black Friday – the consumer world beckons with new bargains almost daily and thus fuels consumption. And those who are short of money and still want to take advantage of such bargains can take advantage of one of the numerous credit offers at supposedly “top” conditions. Everything really that simple? No – warn the consumer protectors.
No money, but seen a great offer? Urgent repair of the car, unexpectedly high service charges, but no money in the till? All these are situations where credit is the number one choice to bridge the financial bottleneck. Mostly by using an overdraft facility, no matter how expensive it is, or by means of a classic instalment credit or consumer credit. And why not? The loans are inexpensive, can be called up at any time, regardless of opening hours, and all of this from the sofa at home. There is actually no better way!
Could it? No – it really couldn’t be better, and yet consumer protection agencies are increasingly warning against the new “simplicity” in consumer credit. Their main argument? The costs of a loan are hardly transparent and the advice is in any case not available for the majority of all consumer loans from the Internet. In the opinion of the consumer protectors, even a small loan can lead to overindebtedness.
“Loose” attitude to credit is growing from year to year
And the fact that UK citizens are taking an increasingly relaxed approach to the topic of “credit” is shown by the Credit Compass, which is published annually. In 2019 alone, UK consumers concluded more than eight million contracts for consumer credit. This represents a significant increase of 4.6 percent more than in 2018. Consumer credit is “in” – which is not really surprising given the advertising promises of “credit made for you” etc. From the consumer’s point of view, credit and loans – thanks to appropriate marketing and advertising – are simple, fast and above all uncomplicated.
But it is precisely these advertising promises that consumer protectionists see as an increasing danger for consumers, because
“Banks and vendors suggest to customers that a loan is not a problem at all. But they should actually put the brakes on some buyers when they take out a loan,” says Dark Ulban, Director of the Institute for Financial Services. From his point of view, it is above all those loans that are not taken out directly with a bank that pose a problem. Consumers are increasingly signing a loan agreement in the salesroom of an electronics retailer, furniture store or car dealer. The following figures from a study by the Financial market of the consumer advice centres are proof of this :
- 14 percent of all loans are a zero percent financing
- 8 percent are linked to the purchase of a specific good – such as furniture or consumer electronics
- 20 percent finance a car purchase
Advice is becoming less and less frequent during a credit discussion
“Many sellers, but also banks, do not advise or do not advise enough on the conclusion of loans. They should actually check responsibly whether the customer can afford the financing in the long term. Instead, they sell their goods and are not interested in credit advice.
Which, from the point of view of the consumer protector, significantly increases the risk of over-indebtedness. This is because the focus is clearly on sales as an indication of the disadvantages of credit-financed purchases. Not to mention a possible interest in whether the customer can afford the desired object financially at all.
Suffering permanent topic: the residual debt insurance for loans
Another problem with lending is that unforeseen costs often arise from additional contracts. Andrea Heyer, financial expert of the consumer advice centre of Saxony, knows of cases in which an accident or life insurance policy, a building society savings contract or a credit card was sold at the same time. However, the most typical case is the simultaneous conclusion of an expensive residual debt insurance policy, which is intended to repay the loan if the debtor is no longer able to pay the instalments due to illness, for example.
The problem is that the insurance premium is due in one go right at the start and is regularly financed in addition to the loan amount. But the bank does not have to include these costs in the effective interest rate if it can prove that the insurance was taken out voluntarily. The contract forms are designed accordingly. For consumers, it is all the more difficult to identify the actual costs they will incur.
“Many borrowers also have the impression that they have to take out this insurance if they want to take out a loan. But this is not true. Consumer credit is available even without residual debt insurance.” But for the bank, it’s a good deal. It earns money on the insurance and at the same time its risk of not being able to repay the loan is reduced.