Consumer credit legislation was revised on September 1, 2019. As a result of the change, the majority of loans became interest rate caps with a ceiling of 20% per annum. In addition to interest, other expenses were limited to a maximum of 0.01% per day or USD 150 per year. In addition, the cost of extending the payment period is limited to USD 20 per year. The reform applies only to credit agreements concluded after 1.9.2019.
If the lender or intermediary does not comply with the new restrictions, the consumer will not have to pay any interest on the credit or any other credit costs.
With the interest rate cap, the interest rate on the credit is 20 per cent.
What kind of loans are covered by interest rate caps and what changes?
The reform will apply to almost all credit, as they will only be excluded from regulation
- mortgages secured by housing or other property
- hire purchase of cars and other transport equipment.
The previous interest rate cap, which came into effect in 2013, only covered loans under USD 2,000. Under that limit, the effective annual percentage rate of charge on consumer credit could not be higher than the reference rate laid down by the Interest Act plus 50 percentage points. In practice, however, the law has been circumvented by various credit lines, which, for example, can yield up to hundreds of percent of the annual percentage rate of charge, for example, on consumer credit or instant credit.
The new interest rate cap is not linked to the amount of credit or to the annual percentage rate of charge. In the future, the regulation will also apply to so-called commodity-linked loans, ie payment by credit card or installment (except means of transport).
Why a new interest rate cap?
The primary objective of the new regulation is to raise interest rates on unsecured loans, and in particular on small loans, ie instant loans.
In summer 2019, there were over 380,000 defaulters in the country, compared to just under 310,000 at the beginning of the decade.
The reform will also make the loan industry clearer in every respect. Interest rate caps make it easier for a consumer to compare loan products when the same rules apply, for example, to consumer credit, credit cards and installment agreements. In the future, all forms of financing will have the same maximum cost limit.
In addition, the interest rate ceiling facilitates the work of the Regional Government Office and the Competition and Consumer Protection Agency, which oversee the marketing of consumer credit and the legality of credit agreements.
Debt problems may even get worse
In the long term, the interest rate ceiling law will erase the interest rates on the loan market, but it will not eliminate the problems caused by default and financial difficulties.
The new interest rate regulation will not apply to credit agreements made before September 2019, so the interest rate cap will not alleviate the situation of people who have already over-indebted due to high borrowing rates. Due to poor solvency, this group has hardly had the opportunity to compete for credit.