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Finland braced for short-term rise in defaults after limiting interest rates on loans

A new law coming into force on Sunday limits interest on consumer loans to 20 percent, making life difficult for payday lenders.

Pikavippiä haetaan puhelimella.
Payday loans have been easy to get using mobile phones. Image: Henrietta Hassinen / Yle

Consumer credit gets a revamp from 1 September, when a new law limiting the cost of borrowing comes into force.

From that date loans can only be taken out if the interest rate is below 20 percent per year. In addition, other costs associated with loans will be limited to 150 euros. Before the reforms, the interest rate cap has been 50 percent on loans of up to 2,000 euros, with no limit above that figure.

Mortgages and car loans are excluded from the reform.

The goal is to reduce over-indebtedness, but in the short term is expected to lead to a rise in payment defaults.

"Lenders won’t dare to take such big risks as before with the new lower interest rates," said Juha Pantzar of the Guarantee Foundation debt advice charity. "Therefore a person who has been paying off their loans by taking out new ones, won’t get credit in future and therefore won’t be able to pay their bills. That will lead to an increase in debt problems.”

That is not necessarily a bad thing, according to Pantzar.

"Repayment time comes one day in any case, and the quicker a debt spiral can be interrupted, the smaller the sum that needs to be repaid."

More restrictions on the way?

Finance companies involved in high-risk lending say the new rules will restrict the supply of loans to their customers.

"Services will be offered to a smaller proportion of consumers, and probably more applications will be rejected, because under the new pricing rules so-called high risk customers can't be granted loans," said Kim Ahola of payday lender 4Finance.

Others, meanwhile, say the regulations don’t go far enough.

Firms are expected to respond to the changes by offering bigger loans over longer repayment periods to keep their profit margins high.

Paula Hannula of the Finnish Competition and Consumer Authority (Finnish acronym KKV) suggests that Finland could counter this by following Sweden in limiting total costs associated with a loan, rather than annual charges.

"Over there the cost of credit and debt collection cannot exceed the value of the loan, however long the repayment period is," said Hannula. "Here lenders can levy the maximum charges allowed every year, which could commit [lenders] to longer repayment periods."

Pantzar also recommends Finland bring in a so-called 'positive credit register' which would combine loan and income information for lenders to evaluate borrowers' ability to repay.

At present they can only ask an applicant and check the register of payment defaults, and have no way of knowing for sure if an applicant has other consumer loans.

At present some 400,000 people appear on the register of payment defaults, and therefore face problems getting credit.

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