A loan with an unpleasant surprise at the end. We are publishing a new Responsible Lending Index

In the run-up to Christmas, we traditionally introduce the new Responsible Lending Index, which compares consumer lending products. This year, we have compared more than 30 loans, which we evaluated using 14 parameters. These include cost, transparency, customer friendliness, and credit checks. The result is a ranking from the top-rated products to those to be best avoided.

"Four stars means an acceptable price, clear information, and fair business conditions. Three-star companies are also fair, but they could be more client-friendly in some aspects. Examples include extensive contractual documentation, lack of information on the maximum interest rate, or loan calculators using indicative prices that almost no one can access in practice," explains David Borges, an analyst at People in Need and author of the Responsible Lending Index. "However, the approach of lenders is gradually improving. Many of them also see the index ranking as a kind of feedback and are trying to catch up with their competitors who are ranked higher. We are happy about the market getting safer. That is exactly the point of our benchmarking," the analyst adds.

A loan can make the situation worse

The price of a 50,000 CZK model loan is between 3,000 and 5,000 CZK for the best-rated companies. On the other side of the ranking are extremely expensive providers charging hundreds of per cent per year for a loan. In a year, that loan could cost you 90,000 CZK (CFIG Credit and ViaSMS) or even up to 183,000 CZK (Movinero*).

Almost half of the companies in our Index are well-rated. However, a stable income is required to obtain an affordable loan. The applicant must not have an adverse credit history either. Not everyone meets these conditions, so people who cannot get a loan from a responsible provider must turn to one of the less solid non-banking companies.

While loan companies specialising in people with financial difficulties will provide a loan, the borrower has to expect to pay extra. Unfortunately, these higher costs may be why borrowers often cannot repay their loans. "Of course, the borrower has to assess their ability to repay, but if a lender approves a loan to a person who is likely to have problems repaying the debt, the lender is breaking the law! Such a loan is invalid, and the borrower is entitled to a refund of the interest paid," warns David Borges.

Default will make a loan more expensive

One of the essential parameters of the Index is the total cost the consumer has to bear in case of delayed payments. The cost of reminders, forced repayment, and additional interest for a model loan of 50,000 CZK after nine months ranges between 6,000 and 13,000 CZK for the fairer companies. However, the costs for the same loan amount from more expensive companies can easily run into the high tens of thousands.

"Regardless of the cost, however, the principle applies that people who have run into repayment problems should not stick their heads in the sand, but communicate with the lender as soon as possible," our analyst says, adding that more and more companies are trying to find a middle ground with clients in trouble and seek solutions instead of threats.

Problematic revolving credit and "IČO" loan

In the credit market, we see a shift from traditional loans with regular repayments towards revolving products. These are credit limits that people can repay according to their means. "While this sounds tempting, the danger is that, in practice, people repay the loan very slowly and pay much more interest than originally planned. That's why we recommend opting for a conventional loan with regular repayments," says David Borges, noting that, paradoxically, revolving products often lack a calculator that would give people a better idea of the total cost.

We also consider a consumer loan from CFIG Credit to be completely inappropriate. The borrower only pays the (relatively high) interest during the year and only in the last instalment must repay the entire principal at once. Such an arrangement can be a very unpleasant surprise for many people.

In addition, several companies have withdrawn from the consumer loan market and now offer only business loans, known as "IČO" loans. "We warn against taking out such a loan unless it really is for business purposes. Legal protection of the weaker party, i.e. consumer protection, does not cover business loans. Some providers take advantage of this fact," the analyst stresses. This risk will likely increase from the new year onwards, as many temporary workers currently working under a work contract will formally become self-employed and therefore "tempting prey" for unfair lenders. 

There's no shame in asking for help

When people run into financial problems, we always recommend looking for solutions other than credit as the primary option. Some providers promise their clients will not fall into debt traps by offering credit, but they cannot be trusted. The state provides practical help. If you lack information on whether you might be entitled to or how to apply for social assistance benefits, you can contact our advisers via our helpline at 770 600 800.

Responsible Lending Index methodology

Criteria and weights for each parameter:

Loan cost (over-payment): 20%

Default costs: 20%

Calculator: 5%

Maximum loan rate: 5%

Sample contract: 5%

Scope of documentation: 5 %

Information on default costs: 6%

Procedure for repayment problems: 4%

Limitation period modification: 5%

Use of direct enforceability clause: 5%

Recovery of time-barred claims: 5%

Use of form claims: 5%

Use of credit registers: 10%

When calculating the costs, the evaluation is based on the standard price of a model loan of CZK 50,000, payable in twelve monthly instalments. The calculation is based on the average price quoted by the provider. If such a price is unavailable, we use a price equal to two-thirds of the difference between the highest and lowest interest rate or other representative values. The cost also includes any fees for the assessment, granting or drawing of the loan and periodic fees for the administration of the loan or for the maintenance of the account necessary for granting the loan. Marketing promotions were not considered, such as the first loan being interest-free or one or more last instalments being waived. Costs related to loan non-repayment were also assessed, i.e. the number and price of chargeable reminders or other recovery costs, any penalties, default interest, commercial interest according to the contractual terms and conditions, and the cost of legal proceedings.