The Responsible Lending Index: How to Choose a Loan Safely in the Czech RepublicPublished: Jul 11, 2022 Reading time: 9 minutes
The Responsible Lending Index is a guide that compares all the conditions associated with taking out small unsecured loans from all banking and non-banking companies on the Czech market. At a time when more and more households are struggling financially, this service of ours is more necessary than ever, as it highlights hidden risks that the borrower may not initially be aware of. For example, the first free loan option that some companies use to lure in new customers, is something that continues to get more and more people into trouble because they do not always understand the fine print.
In the Index, we focus on loans used to bridge a financial shortage in the short term: credit cards, overdrafts, revolving and internet micro-loans. Due to its comprehensiveness, our ranking system is a unique, and important, tool for customers when deciding where and how to take out a loan safely.
Today, Zuzana owes more than CZK 200 000 (roughly €8,000) because of an initial loan of CZK 10,000 (roughly €400). Before the pandemic, she worked in a food truck, but lost her job because of COVID. She had wanted to fix her loss of income with a revolving loan, but she began to have a problem with paying the instalments. She then tried to resolve the situation by taking out micro-loans from other companies, but in the end, she just kept having to borrow money in order to repay what she owed. This merry-go-round of constantly borrowing and re-paying continued to gain momentum until it eventually ended in a property foreclosure.
Considering a Loan
According to data from Czech Radio and the research company PAQ Research, a third of households have already reached the income poverty line or have very low incomes, coupled with savings that would keep them afloat for one month, maximum. The number of people in this situation is bound to increase.
“Keeping the family budget in positive digits is becoming increasingly difficult. Not only are energy prices rising, but food, fuel and many other items are also going up. Therefore, even people who did not have to in the past are starting to think about a loan. At the same time, banks that generally lend at affordable rates will likely restrict access to lending, especially if unemployment rates start to rise. Those interested in bank loans will then begin to move onto non-banking companies, which may cause difficulties for them, that we hope to highlight with this Index,” says David Borges, an analyst at People in Need and one of the creators of the Responsible Lending Index.
The More Stars, the Safer the Loan
The current Index assesses 42 companies, regardless of their consent to be evaluated. Thirteen of these companies are banks, the rest are non-banking companies. The authors of the Index examine the loans offered using 15 different parameters, divided into three areas. The first area includes costs (i.e. how much people will pay for the loan, what a possible three-month extension would look like in terms of price and what cost they will bear if they are unable to repay the original loan. It is cost area that carries the highest weight in the final assessment of the organisation). In the second area, the Index evaluates transparency (i.e. the scope and clarity of the information provided to people interested in a loan) and in the third area, the Index looks at client friendliness and responsible lending (i.e. how thoroughly the company assesses the ability of the individual to repay the loan). The result is a ranking of companies from the best to the weakest.
To make things simpler, the Index divides providers of small loans into five groups using stars. “The more stars, the better the service i.e. the more responsible the provider. We would not recommend taking a loan from companies that have no stars on the Index, or that only have one or two. Three or four stars point to a solid standard, i.e. a responsible provider,” explains Daniel Hůle, Head of Debt Counseling at People in Need.
For our original charts in Czech, please see our library on Tableau Public
The Differences in Loan Prices
When comparing the cost of loans, the authors used a model example. It assumes that a person needs to borrow CZK 10,000 (€400) per month.
Recently, it has become clear that the prices of different companies for the same loan differ significantly. It is also important to note that there are differences between individual types of loans. While you may pay a few hundred CZK (over €40) for a monthly loan via credit card or overdraft, more than half of micro-loans will cost you CZK 2,000 (€80) or more.
Eleven companies report overdraft fees of CZK 10,000 (€400) with a period of 30 days costing between CZK 141 - CZK 220 (€6 - €9).
For a credit card with a limit of CZK 10,000 (€400) over a period of 30 days, you will pay CZK 116 - 357 (€5 - €14) at nine companies.
For a one-off loan of CZK 10,000 (€400) over 30 days, you will pay thirty-one companies CZK 71- 4,450 (€180). “Unlike overdrafts and credit cards, in the case of micro-loans, it is extremely important who the provider is,” says David Borges.
Advice about Repayment
Since the first year of the Covid-19 pandemic, we have been monitoring whether company website include information for clients who run into difficulties when it comes to repaying their loans. Or, whether companies offer any guidance for responsible borrowers who are trying to solve problems and need to know how to proceed and who to contact. “The approach of individual creditors varies a lot. Some companies do not seem to anticipate such an eventuality at all. Others indicate at least contacts for this case. The best ones, such as Komerční banka, have information on their website about the possibilities that the client has, including an explanation about what a reduction in repayment might mean for them. There is also an interactive form available on the website for those who need to reduce repayments,” says David Borges, adding, “This helpfulness has already paid off during Covid. When the lender offers the borrower an acceptable solution, people are usually able to meet their obligations, albeit a little later. We consider such approaches to be reasonable for both sides.”
Games with Statute of Limitations
In the Responsible Lending Index, the authors also look at whether companies are collecting on time-barred debts and whether they are extending the statutory three-year statute of limitations. "We came across extensions to 5 and 6 years - Zapujcky.eu and SOS Credit, but also to 15 years, specifically at Oberbank. This is legal, but from our point of view, very unethical. Imagine that you repay the loan at 30 and 15 years later the lender comes to you with the fact that you need to pay, for example, penalty interest. That is really something banks are not supposed to do," Borges says.
The statute of limitations does not mean that the lender cannot sue the borrower. "Even a time-barred loan can be taken to court. But if the borrower argues that the claim is time-barred, the court will accept it," Borges points out, explaining, "It's just that most people don't know they can argue that. So some companies try to sue time-barred claims, while others sell them on. We urge them to refrain from doing so, and we are pleased that we have already reached agreements with some companies about this issue."
The First Loan for Free
For the first time this year, our evaluation also includes information about whether the provider offers the first loan for free. Such offers may sound attractive at first, but not upon closer inspection. “Companies that present this offer are almost always very expensive. Their annual interest rates usually exceed 300%. Believing that they will save, people may borrow ten thousand crowns (€400) for free, pay their rent and energy bills, but then do not have the money to return the entire instalment for the month. For this reason, they must extend the repayment period of the loan. People might borrow eight thousand CZK (€320), but with an interest rate so high that the next instalment is already 11 thousand CZK (€440). Then they will not repay it again and will need another extension with even higher interest rates,” Borges explains, as he describes a common model of a debt spiral.
Taking a Loan as a Last Resort
“Before people solve their financial difficulties with a loan, they should think about other options. Assess income and expenses. Consider whether it would be possible to temporarily take on a part-time job, or whether they could find another job that pays more. And if they are in such a tight situation that after paying the bills and buying food, there is not much left, it is always possible to apply for social benefits. They should check whether they are entitled to these benefits and they certainly should not be ashamed to apply for them, because it is money that they will not have to return and will not need to pay attentional interest on,” strongly suggests Daniel Hůle, adding that it is the mission of People in Need to provide assistance in these difficult situations. Debt advisors are available in 57 locations around the Czech Republic and people can always call the helpline +420 770 600 800 to speak to someone over the phone.
Web CalculatorsMost providers have functional calculators on their website that give realistic estimates of the monthly interest and the total amount that will need to be paid. For seven companies, we had some reservations about their calculators and in nine cases, we could not find functioning calculators on their websites.
Maximum Interest Rates
Seven companies either do not show the maximum price of the loan on their websites, or we have some reservations about how they display the maximum price. These include Oberbank, Razdva Loan and VR-Nordoberpfalz.
31 lenders show model contracts on their websites, 11 do not.
Length of Contractual ObligationsFor 11 providers, we found that 20-page contracts are sufficient, but for 15 providers, we found that 21 or even 40 pages would be needed in order to truly understand everything and for 16 providers you, more contractual documentation is needed than what was provided. The companies with the most lengthy documentation are Komerční banka and Airbank.
Statute of Limitations
Most companies use the standard 3-year statute of limitations, but three companies extend the statute of limitations for 5, 6 and even 15 years.
Recovery of Time-Barred Claims
24 companies (more than half) do not collect time-barred claims. For the others, this cannot be completely ruled out, and they can either recover time-barred debts themselves or through third parties.
According to our information, 13 of the companies assessed (one third) either do not check the creditworthiness of their clients in either of the two main credit registers or were not willing to provide information about this procedure. In all cases, these were non-banking companies.
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Parameters of the Responsible Lending Index and their percentage weight:
- What is the cost of an extension? 15%
- What are the non-payment costs? 15%
- Is there a fully functional calculator available? 5%
- Is the maximum price indicated in addition to the calculator? 5%
- Is there a contract template on the site? 5%
- How extensive is the contract? 4%
- Is there relevant information about how to proceed with repayment problems?: 5%
- Is there information about non-payment costs? 2%
- Does the company extend the statutory limitation period? 4%
- Does the company offer the first loan for free? 4%
- Does the company use notarial deeds with a direct enforceability clause? 4%
- Are time-barred receivables enforced? 4%
- Do form applications only apply? 4%
- What is the rate of use of credit registers? 9%