New Responsible Lending Index: 300% annual interest and more. Who to avoid when seeking a loan

What's new

What has changed since last year? People are increasingly going into debt at the point of purchase. Two providers in our index, Twisto and Skip Pay, focus on so-called deferred payments. Both provide loans in a fundamentally responsible way, but they can also encourage irresponsible purchases of unnecessary items. Compared to last year, we have also seen the closure of several companies that were among the worst-rated.

A growing number of people are contacting a Financial Arbitrator to review the terms under which they entered into a loan. Often, it turns out that the loan is overpriced, i.e. it is immoral, or the provider has not assessed the applicant's ability to repay. The result is often an amicable settlement in which the provider forgives the interest, and the borrower repays only the original borrowed amount.

Banks usually play fair

"Banks have traditionally performed well in the Index. The most frequent offence is not the exorbitant cost of the loan, but rather the lack of clear information," says our analyst David Borges, one of the authors of the Responsible Lending Index. "But the situation is improving. Banks have added model contracts to their websites, are refining advice for people in difficult situations, and are generally checking people's ability to repay," he adds.

The most affordable loan remains the current account overdraft. Banks usually charge an annual interest rate of around 20%, and our model monthly loan of CZK 20,000 would cost around CZK 300. However, this loan is not without risk. "An overdraft is a treacherous trap, especially for young people who, until they start earning a decent income, become, in effect, vassals of the bank," says Daniel Hůle, head of our debt programme.

It is slightly more expensive to borrow using a credit card. In this case, the monthly interest usually does not exceed CZK 400. "If we use a credit card to pay for goods or services, we can take advantage of an interest-free period, and if the client settles the debt on time, the loan costs nothing. But we must be careful when we need to withdraw cash. Interest is charged from the first day if we use a credit card to withdraw money from an ATM. Not every credit card holder knows this," warns our analyst.

However, the most significant risk of credit cards comes from elsewhere. You only need to make a minimum payment when making a monthly credit card payment. This payment usually amounts to 3 to 5% of the amount borrowed, which sounds like a good deal. "The problem is that these minimum repayments only slowly pay off the original debt while new interest and fees continue to accrue. So people are often surprised that they are only back to square one after many months of repayment," notes David Borges.

Some non-bank loans can be a nasty surprise

Once again, the Responsible Lending Index shows the vast differences between banks and non-banks. While the larger ones are similarly safe as banks for people seeking credit, many smaller ones offer loans with very harsh terms. In general, non-banking companies have higher costs than banks.

Consumers can find the cheapest short-term loans with an interest rate of around 30%, which for a one-month loan of CZK 20,000 represents roughly CZK 500 in interest. However, such a cheap loan is an exception. Annual interest rates of 300 to 400% are much more common, and the borrower has to pay back 5 to 7 thousand crowns more than they borrowed.

"The worst performer is Kontext Trade International's Půjčka7, where the fee and interest rate combination equates to an effective interest rate of around 700% per annum. In practice, this means that a household borrowing CZK 20,000 from this company will pay about CZK 12,000 more when it is repaid," points out David Borges.

In case of default, the most expensive loans can cost tens of thousands of crowns (Ofin.cz, Rerum Finance, or Swiss Loan). If a loan is unavoidable, consumers should avoid the companies at the bottom of the "Loans" chart!

Those who want a loan for too much have nothing

According to the Czech courts, loans with interest rates exceeding approximately 60% per annum are contrary to good morals and, therefore, invalid. In such cases, people are often obliged to repay only the amount borrowed.

"We are currently dealing with hundreds of similar cases, where non-bank lenders sometimes even refund money paid in excess of the original loan amount," says Daniel Hůle, head of our debt counselling service. He recommends that people who have been charged high interest rates contact our helpline at 770 600 800.

A loan may also be invalid if the lender does not sufficiently assess the borrower's ability to repay. "This means failing to verify income, settling for an apparent underestimate of living costs, or ignoring outstanding loans already taken out," says David Borges.

How not to get trapped

When evaluating companies this year, we once again encountered practices that confuse loan seekers. Some providers try to disguise high interest rates by listing monthly or even daily interest on their websites instead of annual interest. You may also see companies charging low or no interest while including high fees in the loan repayments.

Nine non-banking companies entice consumers to take out a free first loan. The free first loan uses a similar model to credit cards, which also lure customers with an interest-free period, but they are more likely to rely on the loan not being honoured. The consumer's sense that this is a bargain often dissipates after a month when they can't scrape together enough money to repay it in full and have to borrow again, but this time at a high interest rate—similarly, the various discounts and promotional offers that many consumers hear about also work.

A loan calculator should clarify the loan, but this is not always the case. That's why we've paid closer attention to calculator reviews this year. "For example, we focused on the clarity of the data displayed and whether the loan applicant can set the repayment length in the calculator. Unfortunately, only nine products received an excellent rating of 90 per cent or more, while consumers could not find the calculator for 12 loans at all," the author of the Index explains. The calculator is missing for overdraft loans offered by ČSOB, Fio Banka, Komerční Banka, and Moneta Money Bank. Other banks have managed to program loan calculators.

We have also been more attentive to information availability for clients with repayment problems. Here, there are still major differences also. The top-rated companies have easily accessible information directly on the web. In addition to providing general information about resolving problems promptly, they explain the options available and encourage contacting them with any questions, such as when and how to defer repayment. Customers could find this information for at least half of the products assessed. In four cases, on the other hand, the information is entirely missing, apart from the company's telephone number. That was the case for the websites of Fio banka, Ofin.cz, and Půjčka7.

There are also differences in the provision of information on sanctions or reminders. Customers could find clear details directly on the website or in a dedicated document for about half of the providers. In contrast, for six companies, the only source of information is the contract's text. The contract documents for credit cards from Komerční Banka, Raiffeisenbank, and mBank were the longest, with each containing more than a dozen pages.

The Responsible Lending Index contains 15 parameters divided into four areas:

• Costs– the cost of the monthly loan, the three-month extension, and the items charged on default

• Transparency – accessibility and clarity of loan information

• Leniency – how society treats people who get into trouble with repayments

• Creditworthiness review  – how thoroughly the company assesses the ability to repay the loan

The most significant weight was given to costs, i.e. interest rates, fees, and payments for reminders or penalties. However, we also assess the website's content, the care with which companies screen loan applicants, and how they treat people who run into repayment issues. All the parameters are summed up in one number that shows whether a company's loans are safe for consumers.