Will the interest rate ceiling further reduce the excess debt?

This happened at about the same time as Good Finance presented new statistics that showed that fewer and fewer people have debts with Good Finance. The enthusiasm for the future is thus great even though there are some clouds of concern in the sky, which you can read more about further down this page.

It’s no wonder Good Finance thinks it’s a good thing to do with an interest rate ceiling because they assume that this will reduce the excess indebtedness and that fewer quick-blue cases will end up with them.

But the question is whether it will really get so much better. Sure, it makes sense with an interest rate ceiling and a cost ceiling, but it is not at all certain that this will lead to a reduction in over-indebtedness and that fewer loan cases will end up at Good Finance.

Risk of the opposite effect

Risk of the opposite effect

In a previous blog post, we explained that an interest rate cap does not necessarily have to lower borrowing costs, nor is it certain that it will reduce the excess debt. What can happen if an interest rate cap is introduced is:

  • Lenders who offer sms loans with a few months maturity start to offer annual loans instead, ie loans that have a maturity of one or more years.
  • These lenders will probably set their interest rates right at the interest rate ceiling, around 40%. Okay, it is very possible that several lenders will offer an interest rate of around 30% since there are already quite a few fast loans with a maturity of 1 year and up that have such an interest rate, they certainly want to compete with these.
  • Some lenders will also raise their loan amounts so that they continue to make a good profit.
  • This will mean that the final loan cost will not always be lower than it is today, partly because the maturity will be longer, and partly because more Swedes will borrow more than they otherwise might have done.
  • Many of those who cannot pay for their loans will generally have a greater debt than they otherwise would have, which can exacerbate the excess indebtedness due to sms loans.

Interest rate ceilings exacerbated indebtedness in Finland

Interest rate ceilings exacerbated indebtedness in Finland

We have on a number of occasions written a bit about Finland to try to come to a conclusion about how things will go in Sweden after the interest rate ceiling is introduced. Finland introduced an interest rate cap in 2013 for loans of max 2000 dollars, but apparently it has not improved the situation with regard to over-indebtedness.

On YLE’s (the Finnish equivalent of Sweden’s SVT) website on January 10, 2018, we were met by the headline “Debt-owed debt is getting bigger”. We know that we have written about Finns’ debt problems in the past, just as YLE has done time and time again, but it is worth repeating since the interest rate ceiling five years after it was introduced has not improved the situation in Finland at all. Here is how you can summarize YLE’s article :

  • Debt has increased year by year among the over-indebted, according to the Guarantee Foundation, which is trying to help them.
  • Among those who called the Guarantee Foundation’s support phone, the average debt was 6,000 dollars (about USD 60,000) greater than five years ago. Today, the average debt is almost 29,000 dollars. This is a bit interesting because the average debt was much lower before the interest rate ceiling was introduced five years ago, which is, of course, terrible for those affected.
  • Five years ago, those who took too many quick loans quickly had payment difficulties, but the total debt was smaller and easier to get rid of.
  • Today, when Finland’s fast loans become larger because of the interest rate ceiling, more people are taking large fast loans. This means that many who are unable to pay back their loans often have a much higher debt than people had 5 years ago.

Yes, what can you conclude from this? Probably the Swedish interest rate ceiling will also not be a miracle cure for indebtedness due to sms loans. On the other hand, a very small part of the total debt of Good Finance consists of sms debt, about 0.16% more precisely.

Good and bad news from Good Finance

Good and bad news from Good Finance

Yesterday (18 Jan 2018) Good Finance presented new statistics regarding debts at Good Finance which is also relevant to this article. This is what these statistics look like in brief:

  • The number of people who have a debt with Good Finance has decreased. In 2017, the number of indebted persons was 417,693, which was the lowest number since 1991. In 2016 there were 423,184 and in 2015 it was 427,734. This is a reduction of just over 10,000 people over two years. The reason is considered debt restructuring and a good Swedish economy. That was the good news.
  • The total debt amount at Good Finance has increased from just over USD 72,390,000,000 (in 2016) to approximately USD 78,732,000,000 (2017). It is thus more than USD 6 billion in a single year, but of course, it does not have much to do with sms loans, but it is mainly the mortgages and debts to the state that are the biggest culprits. This is bad news. Another bad news is that 100,000 people got their first debt registered with the bailiff last year, but so more people got rid of their debts as the number of people dropped.

We at Good Credit can draw a certain conclusion from these statistics. It is not the small loans that are the biggest problem in this country, if that were not the case, the number of people with cases at Good Finance would not be the lowest in 26 years since sms loans did not come to Sweden until 2006. In such cases, the number of people with Good Finance has been the lowest since type 2005, not since 1991, but the situation at Good Finance was actually worse in the years just before the sms loans came to Sweden.

Thus, it is the big loans (and liabilities to the state) that are the biggest problem, and what will it look like when today’s small sms loans are converted into larger fast loans with effective interest rates of 30 – 40% that are repaid over several years? Maybe the situation will get worse instead of improving. Let’s hope it doesn’t.