One-off Loans Can be Risky, Warns the 2023 Responsible Lending Index

The purpose of comparing the conditions of all these small loans on the Czech market is to be able to provide this comprehensive guide, also known as the Responsible Lending Index, to better inform individuals interested in taking out loans about which places are trustworthy and which places to steer clear of. This Index also acts as an important piece of feedback for lenders about their products, and has an important influence on the loan market in the Czech Republic, as we have seen in recent years. At this point in the year, our Responsible Lending Index usually focuses on loans pertaining to bridging short-term financial gaps, namely having to do with credit cards, authorised overdrafts and revolving and micro-loans.

Poorer families save little, often just struggling to make ends meet

At a time of soaring prices, many people struggle to make ends meet. This is especially true of poorer families with children. Data provided by PAQ Research and Czech Radio (in Czech) reveals that one-third of these families ended February 2023 with no savings whatsoever and a quarter of them had a negative balance. Living costs are most often the greatest expense, with poor households devoting as much as 40 % of their income to housing. 

“We believe that the situation is beginning to improve. The levelling out of prices and the imposition of caps on things like energy prices, as well as the provision of additional housing benefits, help to protect vulnerable households. Unfortunately, the payments of some of these benefits remain delayed, which puts people without any savings whatsoever in quite critical situations. To retain their homes, they often have to resort to taking out loans, and because they often cannot find success with banks, they are forced to take out expensive non-bank loans. Not every non-bank company is problematic, of course, but borrowing money with an interest rate of 100% often leads to difficulties in repayment and having to take out extensions or take out additional loans to pay back the first loan," says People in Need analyst David Borges, one of the authors of the Responsible Lending Index.

For lower-income households, he does not advise taking out loans that must be paid back as lump sums. “If someone hasn't been able to save anything over the course of the month, what are the chances that they will be able to repay an entire loan with interest during that same time period? For this reason, if a person really has to take a loan, I recommend taking one out which allows them to pay it back in instalments over the course of six or twelve months," he explains. Alternative solutions to financial shortages are discussed in the final part of this report.

More stars mean a lower interest rate and an overall fairer lender

The most up-to-date Index compares 44 short-term loans from 36 bank and non-bank institutions. The loans are then examined using 15 different parameters divided further into three categories. These categories are:

1. Cost – how much people pay for a one-month loan, for example, and how much a prospective three-month extension will cost them. Additionally, we look at how much interest people will need to pay if they default on the loan. This parameter has the most weight on the final score of each institution.

2. Transparency – the comprehensibility of the website, including its overall completeness, and the extent to which additional clear information is readily available.

3. Customer service and financial security – how thoroughly does the company assesses a client's ability to pay back a loan and how do they behave towards people who have defaulted on payments in the past?

The final product is the Responsible Lending Index, which is a list of the companies ranked from best to worst. Basically, the more stars, the better.

You can view the original interactive chart on Tableau Public here (in Czech).

If I borrow 20,000 CZK now, I may need to return as much as 29,000 CZK a month later!

When comparing costs, we used a model example of a one-month loan of 20,000 CZK (€ 844). It is important to note that loans vary dramatically among lenders, so differences between individual types of loans must be noted beforehand. While a one-month loan in the form of an authorised overdraft can cost a few hundred CZK at most (with three banks offering an identical price of 315 CZK (about €13), the same borrowed amount in the form of a micro-loan from Credit Portal or CreditGo could also cost almost 9,000 CZK (€ 390). And while not all non-bank loans are so expensive, the prices of loans from Home Credit, COFIDIS or Kamali are comparable to other various bank products and can vary quite a bit. For this reason, it is important to pay attention and really read the fine print!

Sneaky credit card payments

Few bank products hide as many unpleasant surprises as credit cards. “Many people know that if they withdraw cash from an ATM using a credit card, they will pay a high fee. Quite a few do not know, however, that the interest-free period usually does not apply to cash withdrawals. People are also sometimes surprised that when they repay the loan from a credit card after the end of the interest-free period, they have to pay interest not only for the delay but for the whole period when they were making withdrawals using their credit card,” points out David Borges. “For most people, it is virtually impossible to ascertain the costs of a gradual repayment of a credit card loan. Even so (or just because of this?), most banks do not have a calculator quickly quantifies these costs on their websites,” adds the analyst. In this respect, banks could draw inspiration from Česká spořitelna’s website, which contains a calculator of the costs. Komerční banka used to have one, too, but has since taken it down.

Problematic loan extensions

The websites of lending companies usually compete with each other when it comes to emphasising the advantages of their loans in comparison to the loans of other institutions. However, when it comes to including advice about what customers should do when they find themselves in financial difficulty, the same websites fall strangely silent. Some companies have indeed improved in this respect, offering people possible solutions, an explanation of related risks, a list of information about what the creditor will need from the debtor in case of problems arise and a contact phone number or e-mail to call in case of trouble. If the institution can provide all this information, that's amazing because its the most helpful an institution can be. At the other end of the spectrum, simply providing information about how to get an extension if necessary is probably the least helpful, because those extensions are often offered precisely by the same companies that lend money at high interest to start with. "We know from practice that if the creditor does not burden the debtor with sanctions and offers the possibility of paying back in instalments, over time, for instance, the likelihood that they will actually be able to pay back what they owe increases," says David Borges, highlighting the advantages of institutions that actually help their clients figure out how to pay back loans.

Having to pay interest on a loan even after the agreed-upon period of the loan is over? Yes, it's possible...

This year, we paid special attention to how individual companies approach the idea of having to pay interest on loans that are not paid on time. "The law says that in the case of delay, the creditor may charge the agreed upon contractual interest until the full redemption of the debt, along with a late payment interest, penalties and various other 'entitled costs.' We are pleased that nearly half of the polled companies no longer charge the contractual interest after the loan reaches maturity and, instead, only apply a late payment interest. Certain companies do charge both types of interests at the same time, but have given up the legal penalties. However, it is important to know that some companies do still take advantage of all the costs they are entitled to by law, which naturally leads to even more problems for the client," points out David Borges. At institutions like Rerum Finance and Švýcarská půjčka, the extra costs of delays can quickly reach tens of thousands or crowns! 

We also looked at which companies still collect time-barred debts and whether they extend past the limitation period stipulated by law. “It is disturbing that one of the companies that do this is UniCredit Bank with its ten-year limitation period,” observes David Borges, adding that if the creditor sues for a time-barred debt, the debtor can be saved by objecting to the fact that the claim is past its limitation period.

Honey catches more flies...

We continue to point out the risks connected with institutions that offer the first loan as 'free.' People who use these institutions believe that they are taking advantage of a good deal, but in actuality do not have enough money to repay it a month later and end up having to extend the loan, this time with a costly interest rate that will more than compensate the creditors for their initial 'generosity.'

Basically, taking out a loan should be your last option

Taking out a loan should always be the last option used to resolve a difficult financial situation – mainly because it is not a proper solution. People in Need recommends that individuals who have problems with their housing costs begin by checking whether their household is entitled to any sort of housing benefit. According to the Labour and Social Affairs Ministry data, the average housing benefit is about 5,600 CZK (about € 210) which is a rather considerable sum. People might also be entitled to other social benefits. Individuals who have any questions or find themselves in difficult situations may always turn to People in Need’s helpline at +420 770 600 800 and to our debt consultants at 75 different locations in 13 regions across the Czech Republic for help. We're here to help. 

Other parameters we assessed and their respective weights

Standard cost of a loan 15%

Cost to extend a loan 15%

Cost of loan delay 15%

Credit rating assessment 9%

Web calculator 5%

Having the maximum price listed 5%

Example contract available on the institutions website 5%

Advice on potential problems with repayment 5%

Quantification of costs of delay 4%

Extension of limitation period 4%

Whether they offer a first loan for free 4%

Direct enforceability clause 4%

Collection of time-barred debts 4%

Use of template lawsuits 4%

The extent of the documentation available 4%