For a loan of CZK 50,000, a person can pay CZK 1,700 in interest and fees if the loan is repaid over one year or even more than CZK 100,000. This results from an extensive comparison of the credit market carried out by the organization People in Need.
The organization compared 37 providers of unsecured consumer loans licensed by the Czech National Bank. The Responsible Lending Index evaluated individual companies using fourteen parameters in cost, transparency, and client friendliness.
According to the index, the cheapest model loan for CZK 50,000 spread over twelve monthly installments is offered by Max banka, a newcomer to the market. The interest on the installments added less than CZK 1,700 to the loan. However, according to People in Need, the specific feature of this loan is that it can only be used for consolidation, i.e., as a replacement for existing loans.
Otherwise, the prices of most banks and non-banking companies in the example above are between CZK 3,000 and CZK 4,000.
Smaller companies such as ViaSMS or Viva Credit are on the other side of the ranking.
According to the index, these providers usually offer so-called credit frameworks where the repayments are not fixed, but using the model example of a CZK 50,000 loan, the annual cost of such a loan would be more than CZK 100,000. Detailed results are available on the People in Need website.
However, according to Viva Credit, the People in Need methodology works with a model loan of CZK 50,000, while the company offers up to CZK 30,000. Although it is considering introducing higher loans.
“It should be noted that our credit and its use are designed exclusively for clients who need to cover unexpected financial expenses, not for long-term use, as the People in Need methodology considers,” Viva Credit said.
ViaSMS did not respond to questions. “But it is more complicated with expensive loans. They cannot be condemned unequivocally. If someone is lending money at an interest rate of 50 or 80 percent a year, it is shocking at first glance, but for a person who needs to address a lack of money and has no other option, even such an expensive loan can make sense. The important thing is whether the repayments are set so that the loan can be repaid,” said David Borges, an analyst at People in Need.
“However, if we talk about long-term loans where the lender asks for 300 or 400 percent a year, you can no longer justify it with higher risk. That is a devastating financial product,” he added.
According to the Man in Need index, there have been several changes in offers since the last examination. First, the transparency of loans is improving. For example, most companies now publish contractual documentation on their websites. Previously, this was rather exceptional.
Most companies now have a calculator on their website, although the law does not require this. This is an essential tool for prospective borrowers to better understand what the loan will cost and how repayable it is.
It is important to communicate when there is a delay
Experts advise always thinking carefully about whether the loan is needed, the terms, and whether the applicant can meet them.
Unfortunately, the interest people have to pay when they default on a loan has also risen simultaneously. This penalty has almost doubled in the last year.
“However, this is not a decision of individual companies, but a consequence of the increase in CNB rates,” People in Need pointed out.
The total costs that a lender has to cover for a model loan of CZK 50,000 after three unpaid installments, repayment, and repayment of the debt after half a year are roughly between CZK 8,000 and CZK 15,000 for the fairer companies. Some companies add interest on top of the loan, which makes it even harder to repay the debt.
“We highly recommend that anyone who falls behind on their repayments should not stop communicating with the creditor,” said Daniel Hůle, head of debt counseling at Člověk v tísni.