The consumer credit market has changed a lot in recent years. This change is due to the recent cut in the interest rate cap in 2016. The upper limit was reduced by law from 15% to 10% to avoid over-indebtedness. Since then, the banks have outbid themselves with cheap loan offers. The figure shows the development of the market since 2015.
Only three banks have had to lower their interest rate to meet the ceiling, and all banks have opted for the lowest interest rate strategy. Before the cap came into effect, interest rates were not less than 5.9%. Today we are seeing a real downward trend. In 2017, the lower limit of the interest rate of most banks that offer consumer loans was 4.5%. The lowest rate was 3.9%. But despite the low minimum interest rates, the average interest rate sold is far higher. Only 15% of borrowers receive an interest rate between 4.5% and 6.9%.And between July 2016 and the end of 2017, half of the consumers received an interest rate between 9% and 9.95%, which is three points below the average rate before the further cut but close to the specified upper limit. The average today is between 6.9% and 8.9%.A further drop can currently be observed.
How is compensation made?
The drastic drop in interest rates is offset in other areas. The term of the loans has been extended in recent years. In the past, it was difficult to obtain a loan with a term of, for example, 120 months. In practice, such terms are granted more and more frequently because they generate more interest. Banks have extended their terms, which were 60 and 72 months in 2015, to 84 months. EarnTrust Finance and FundBond Finance even offer terms of up to 120 months.
The same applies to the amount of the loans. Upper limits of USD 100,000 or USD 250,000 are becoming increasingly common, such as For example, in the case of the harpsichord, whose loans in 2015 were between USD 500 and 80,000, whereas today they are between USD 1,000 and USD 250,000.
These changes in the market do not necessarily mean lower costs for consumers, but rather fewer risks. Due to the lower interest rates, there is a tendency towards longer terms and thus more monthly installments. However, the risk of over-indebtedness is lower due to the lower monthly payments. Due to the broader spread of loan amounts, the risks and benefits for customers can be better limited. In addition, laws were passed in 2016 that further help to avoid over-indebtedness. Aggressive advertising for loans is no longer permitted and the withdrawal period has been doubled from 7 to 14 days. Brokers and banks today are required to take account of risks from unforeseen financial problems as part of responsible lending.