Interest rate cap for quickie loans to be lowered

The legislation concerning the interest rate of quickie loans is currently under reform in Finland. As yet, creditors have been able to set an unlimited interest rate cap for quickie loans of over 2000 euros but the laws are now about to change in the consumers’ favour.

For many years’ time, creditors in Finland have been having a constant field day in relation to interest rates on quickie loans. As there has been no set cap for the rates, problems in paying back the debts have grown among the consumers, and the amount of people facing debt recovery procedure has increased drastically. The trend is worrying for Finland, as a nation’s strength in bouncing back in the event of a recession is inevitably intertwined with its citizens’ own financial stability.

Finland’s Minister of Justice, Antti Häkkänen, has previously addressed the concerning development of rising household debts. The legislation for interest rate cap on quickie loans was last reformed in 2013, when a cap was set only for loans of 2000 euros or under. This, however, led to quickie loan corporations mostly granting loans higher than 2000 euros, further deepening the distress of people with financial challenges.

Häkkänen therefore started preparations for another legislative amendment in the autumn 2018, proposing 30% interest rate cap on all quickie loans. As the current legislation allows the quickie loans of over 2000 euros to have unlimited interest rates, has this led to the interest rate rising in some cases to up to 200 per cent.

Increasingly indebted Finns

The Bank of Finland issued a press release in 2018 on the subject, stating that Finnish household debt had reached a historical high. Trading Economics site published some supporting data, showing household debt in Finland increasing from 66.70 per cent of GDP in the first quarter of 2018 to 67.10 per cent of GDP in the second quarter.

Among other factors, the easing of consumer credit standards and the proliferation of digital financial services have led to a situation where consumers have considerably more means of accumulating debt. As Finland is higly digitalised these days, applying for a loan is easier than ever. As a result, the amount of Finns with their credit rating downgraded has also reached a record high,

The current trend of increasing debts among Finnish households worries the experts. Even though being able to get a loan quickly in times of need is an important part of the modern financial landscape, it has become clear that some regulation needs to be put in place. Being deeply indebted makes households vulnerable to the effects of rising interest rates, economic difficulties, and falling house prices.

When facing economic difficulties, Finnish households tend to cut back in their consumption. This, in large scale, increases the bankruptcies among the corporate operating environment, accelerating the deepening of effects of financially difficult times for the whole nation. As a result of bankruptcies, banks face a weakened lending capacity, which restricts economic activities for all. And once in this vicious circle, it is difficult for the nation to break out of it.

More responsibility for creditors

In Häkkänen’s opinion, the rules in the quickie loan business need to be made fairer. This includes making the creditors more responsible for their businesses. Additionally to the interest rate cap to be set to 30%, he also seeks more efficient ways of punishing those creditors trying to avoid abiding the law.

As yet, the creditors have been able to set their own interest rate cap for quickie loans of over 2000 euros. Now it has been proposed that the interest rate and other credit related expenses in total can only sum up to 30% of any quickie loan. In case a creditor is found guilty of exceeding the 30% limit, may the debtor be freed from the obligation of paying back the interest and other credit related expenses altogether. This is believed to work also as a preventive method for possible wrongdoings.

This is not the first time Minister Häkkänen has taken an interest in the consumers’ financial issues. The previous legislative initiative he proposed concerned the debtors’ right to have their debt recovery procedure ceased for up to six months, in case the debtor got employed and had been unemployed for a year prior to that. The bill became a law eventually, coming into effect in February 2018.

Many quickie loan corporations, such as Saldo Finance, now try and engage as many customers as possible before the bill on interest rate cap for quickie loans passes. The pending bill for amending legislation is currently under assessment at the Finnish government. As the Finnish general election is about to take place in April 2019, the preparation of a response is expected to be made by the new government.