October 25, 2020

The Government will force to increase the solvency analysis on revolving loans, but will not limit the rates


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The Ministry of Economy has taken the step to toughen access to revolving loans after the approval on Monday of the order for the regulation of revolving credit that will come into effect on January 2, 2021, The new regulations that will regulate the Loans granted through so-called “revolving” cards – with which there is a risk of falling into permanent debt – will be focused on both increase transparency towards the consumer as well as strengthen solvency analyzes to customers by the entities. However, the measures approved do not contemplate establishing maximum limits on rates, which are usually much higher than normal and in some cases exceed 25%. Nor will the multiplication of interest be stopped, a mechanism that carries the risk of entering a spiral of perpetual debt that is difficult for the affected individual to settle.

[ Consulta aquí la disposición en el BOE]

Next year, banks will have to offer more information both pre-contractual so that the user knows that they are signing and visualize their cost or performance in terms of the annual equivalent rate (APR). They should also explain the procedure graphically to the potential client through examples with specific figures that include installments, calculation of interest and the date on which the loan would be paid. Also, additional details will have to be provided once the revolving loan document has been initialed and during the subsequent months. The financial institution will have to send information quarterly so that the user knows first hand the situation and the amount owed at any time.

To reinforce solvency analysis and payment capacity, banks will have the possibility of access the customer’s credit history through the Bank of Spain’s Risk Information Center. When granting credit, banks will be obliged to analyze, in addition to income, property assets, savings, obligations derived from other debts or commitments, their fixed expenses and the existence of other possible guarantees. This solvency assessment will therefore include numerous variables, and will have the ultimate purpose of “avoiding situations of over-indebtedness that on many occasions ultimately lead to borrowers not being able to meet their financial obligations.” as guidance that the annual amount of the quotas allows to amortize a minimum annual amount of 25% of the limit credit granted.

Also, the rule lowers the threshold for the minimum amount of any credit from 9,000 euros to 1,000 euros, not only the one linked to revolving cards, to communicate to the Bank of Spain the information related to these operations. This measure will lead to more operations being analyzed by the Central Bank’s Risk Center, as interpreted by sources from the Ministry of Economic Affairs and Digital Transformation.

The objective of the new standard is therefore improve consumer protection, while reducing litigation and providing certainty, according to sources from the Ministry of Economic Affairs and Digital Transformation. “Many cases occur due to ignorance of the individuals and the new measures will minimize the cases. We hope that the abuses will be marginal in the future ”, add the same sources. Likewise, from the Ministry of Economy indicate that this rule now makes more sense than ever, since “the situations of economic vulnerability” produced by the Covid-19 may be an effect called towards financing with this type of products.

In a statement, the third vice president and minister for Economic Affairs and Digital Transformation, Nadia Calviño, indicates that, with this regulation, “the contracting of this type of credit will be more transparent and with more information and greater user protection.” The objective is “to avoid possible over-indebtedness and thus strengthen the security of the financial market and the protection of all consumers,” adds Calviño.

Varapalo of the Supreme

The regulation of the Ministry of Economy has been put into effect after last March, the Supreme Court will rule in relation to these quick credits that «the fixing of a remarkably higher interest than money cannot be justified due to the risk derived from the high level of defaults knotted to credit operations granted in an agile way, because the irresponsible granting of consumer loans at interest rates much higher than the normal ones, which facilitates the over-indebtedness of the consumers, cannot be object of protection by the legal order ». In this sense, the High Court considered “usurious” the interest of more than 27% of the APR that Wizink bank applied specifically.

The “revolving” allow the user to access almost immediately a financing of money, 6,000 euros for example, to make purchases and to postpone their repayment in installments, but not to settle the debt in a rush. The borrower has two options: choose a fixed monthly repayment fee, the minimum of which is around 20 euros per month, or choose what percentage of the outstanding balance he wants to return each month.

If the consumer falls into defaults or pays a small part that does not cover the total owed, the following month the bank will continue to owe part of the above plus the corresponding for the current month, with which new interest will be generated. The fixed fee system, which is the most widely used in revolving, assumes that the amount drawn down and not amortized produces interest that monopolizes most of the monthly receipt, so that a very large part of interest is disbursed and almost no principal is amortized.

If the card is still used to finance purchases due to its automatic renewal, the debt continues to grow and, at the same time, the interest, which carries the risk of entering an unsustainable debt spiral.

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