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Payment defaults expected to rise due to coronavirus crisis

Nearly 400,000 people in Finland have payment defaults -- that's 8.5 percent of all adults.

Extraordinary circumstances could cause unpaid bills to pile up and lead to payment default entries. Image: Henrietta Hassinen / Yle
Yle News

Financial insecurity resulting from the coronavirus crisis could cause an increase in payment defaults in Finland, according to credit data agency Asiakastieto. The firm said however that there would likely be a delay before new defaulters come to light.

According to Asiakastieto about 390,000 people -- 8.5 percent of adults -- in Finland have defaulted on their bills.

The credit data agency estimated that people who do not have payment defaults entries recorded against them have a one percent chance of getting one. It added that financial insecurity caused by the coronavirus shock might increase the number of payment defaults but any changes will likely become visible after a delay.

"There are a lot of people who are now overindebted but they don’t have any payment defaults yet. If their incomes shrink it will cause even greater financial problems and payment defaults," Asiakastieto business director Jouni Muhonen said.

He noted that the number of people in Finland with poor credit has been rising steadily for 10 years. He attributed the increase to the fact that people tend to borrow from several different lenders. When monthly payments for cable channels, credit and hire purchase agreements pile up, they may not have sufficient funds to service all of their commitments. The popularity of payday loans has also made it easier for people to fall into a debt trap, Muhonen explained.

Payment defaults may also increase if workers who have been temporarily laid off become unemployed and their incomes are no longer sufficient for their day-to-day expenses.

New interest cap could lead to problems

Finland has attempted to curb household indebtedness in many ways. In July, new legislation took effect, introducing a 10-percent interest rate cap on consumer credit. At the same time a ban on direct marketing of credit products also came into force.

According to Minna Backman, funding services director with the debt counselling organisation Guarantee Foundation, the interest rate cap has advantages and drawbacks. It makes it more difficult for consumers to get loans, and at worst this could lead to payment defaults.

"People could needlessly get into difficulty over a temporary need. If they could get some kind of loan they would be able to get through the situation. But if they cannot get credit, it could be that the situation will escalate until their finances are in disarray. On the other hand it could be good if the situation gets out of hand if it is due to a bigger debt problem. New debt increases the debt burden and [related] problems," Backman explained.

Payment defaults tend to pile up

Payment defaults remain in the credit register for three years on average. However according to Muhonen it is common for one person to accumulate several poor credit entries because one overdue bill may lead to another.

"The same person may have on average 15 payment default entries. By the time an individual gets an entry they have already accumulated several different debts," he added.

According to Backman, few people record just one payment default.

"When the first entry comes, people may think that it’s all the same if they have one or five," she noted.

Asiakastieto data indicate that men have significantly more payment defaults than women. There are also regional variations in the number who fall behind their financial obligations. In the Åland Islands less than five percent of adults have registered payment defaults, compared to nearly 10 percent in the Päijät-Häme region.

Backman said that the regional differences are linked to local employment opportunities.

"The greater the number of unemployed people the greater the number of basic bills left unpaid, such as health care bills," she added.

However she stressed that help is available for people who run into trouble managing their debts. She advised people to get over any shame they might be experiencing and to map out their financial situation.

"Getting into debt is human and it doesn’t mean you are a bad person. There might be unemployment, illness or a divorce behind it all," she noted, adding that payment defaults are not always caused by negligence.

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