For many Swedis, effective interest rates are several thousand per cent, no regulation of the loan terms and a short-term solution that usually results in a debt with the chancellor. We will take a closer look at the black age of consumer credit and find out if it is really right.
The story behind fast loans
Quick loans, also called SMS loans, are a relatively new concept for many. In 2006, the concept of SMS loans was established in Sweden and had an explosive impact. But the loan form goes back much further than that.
As early as the end of the 19th century, lenders began to offer wages. They bought workers’ wages the days before pay for a sum that was less than the actual salary. This became a form of so-called payday loan, which is regarded as the international equivalent of fast loans. This loan form was designed to circumvent the laws on usury that already existed in many states.
Developments in the United States
In the 1930s, the possibilities of, among other things, being able to exchange paychecks increased before the actual payment date, which is also regarded as an early form of fast loans. Then it gained momentum in the 1990s when regular fast loans began to be widely offered in the United States. For a time, there were around 500 storefronts where fast loans were offered, which quickly increased to over 22,000 and in recent years has grown even more in number.
Developments in Sweden
Sweden and the Nordic countries were given the opportunity to fast-track loans in 2006, when the process could usually be as fast as 15 minutes from the application for payment of the loan. Nowadays, however, the loans are usually paid out the day after, when the major banks intervened against the loan form in 2008.
The Consumer Agency and the Swedish Financial Supervisory Authority
Already when SMS loans were established in Sweden, these companies were severely criticized by the Swedish Consumer Agency and the Swedish Criminal Investigation Agency. This, together with the strict supervision from Finansinspektionen, has largely helped the SMS loan companies and borrowers. Today, lenders are regulated, controlled and monitored, which provides an industry where the borrower can feel safe and secure.
Like all industries, it was not completely flawed in the beginning and there were companies that took advantage of this, which in turn led to bad publicity in several cases. However, when much of the industry’s terms and procedures are heavily regulated, unfortunately, a bit of the negative stamp still lives on. One of the biggest negative arguments today is what some claim are extremely high interest rates for fast loans.
Effective interest rate
Under regulations, lenders must explain the loan terms in detail and easily, and also give the borrower a good idea of the cost of the loan. For this, the lender must clearly state the effective interest rate. This in itself is of course positive, but when it comes to loans with a short repayment period, it becomes directly misleading.
Effective interest is an annual interest rate for a credit amount calculated on the basis that the interest is paid once a year, which in turn means that a loan with a much shorter repayment period will receive a misleading effective interest rate.
Chronicle and debt trap
In the beginning, the number of applications to the Gold Crown increased for payment orders linked to high-speed avalanche loans. Between 2007 and 2014, the number increased by as much as 123 percent. The majority of the defendants in these applications were initially young adults, men and women between the ages of 18-25. This seemed logical to many and even today most people believe that most of those who have been indebted for quick loans are just younger people. The age category that in 2014 had the most unpaid debts related to fast loans was persons aged 26-35, followed by persons aged 36-45. Regulations and stricter credit tests have an immediate effect, saving many young adults from the debt trap.
In 2015, however, something happened to the statistics as the strong increase began to level out. The Gold Crown stopped keeping statistics on unpaid quick loans. As a result, it became more difficult to prove what, in fact, many other investigations have highlighted, that debt continues to decline and that fast loans are not the debt trap many people believe.
There are plenty of critics for companies that offer quick loans. These have previously had good arguments for their position at a time when lenders did not always make proper credit assessments and sometimes did not provide borrowers with completely accurate information before entering into a loan agreement. Today, these arguments are still alive, despite the big change that has taken place in the SMS loan industry in recent years.
The industry is much better regulated today, and the loan companies are closely monitored. For many, therefore, fast loans are a form of unused buffer, which we should all have. If the cat cracks the house key and has to go to the vet, if the kids “accidentally” swim with the laptop or if the car decides to park the slippers indefinitely. Then it is very good to have a buffer, something that not everyone has the opportunity to put money away.
Then quick loans work as a very welcome and good rescue. You then have the opportunity to sort out the situation that occurred at very short notice and you do not need to borrow more than you actually need. This in turn means that you can pay off the loan after a short time and then be back to having the opportunity to use it as a form of buffer the next time the accident occurs.
And last but not least, it’s your own responsibility that still weighs most. If you feel that you are able to repay a quick loan, there are no barriers to using it. If, on the other hand, you are unsure of your repayment option, fast loans are not an option you should consider.
“Borrowers should have strong consumer protection, but in the end they have their own responsibility that you cannot ignore. You cannot say in retrospect that you did not know that the loan would be so expensive that you did not understand, could not read or were in a hurry. “
The economist Alexander Guzman participated in the debate on fast loans in 2014 and followed this up with a speech on the policy section where he clarified his arguments with emphasis on the borrower’s own responsibility according to the quote above. Finally, there will be another quote from this post about consumer credit unearned black sheep – Snabblånen.
“Blaming the sms loan industry for ending up with Kronofogden is a bit like blaming McDonald’s for being overweight.”