New car, new kitchen: spending on credit is in demand. But how do you keep track of your finances? Consumer advocates believe that the legislator has a duty to do so.
“Buy Now – Pay Later” – Buy now, pay later. Shopping on credit is popular and the trend is increasing. But consumers often overestimate their financial capabilities. The Federal Association of Consumer Organizations (vzbv) is therefore calling for people to be better protected from possible over-indebtedness during the credit approval process and is putting forward proposals on how the EU Consumer Credit Directive could be implemented in Germany.
In a survey for the vzbv, almost one in five (19 percent) of the 1,000 respondents reported difficulties in repaying loans due to the general rise in prices. In the 16 to 29 age group, the figure was almost one in three (31 percent).
“Loans can help consumers to realize projects such as buying a car or kitchen or to bridge financial bottlenecks. However, we observe that banks repeatedly grant loans that end in consumers being financially overwhelmed or over-indebted,” said Dorothea Mohn, team leader for financial markets at vzbv.
Debt trap installment loan
Buy today, pay tomorrow – from the perspective of many consumers, this is an attractive offer, especially since financing is often advertised at no cost. The vzbv states: “In particular, the emergence of new forms of credit such as buy-now-pay-later, which enable quick financing of goods in online retail, creates new risks for consumers to overestimate their own financial capabilities.”
According to data from the credit agency Schufa, the number of newly concluded installment loan contracts in Germany rose “rapidly” in 2022: by 30 percent compared to the previous year to a good 9.1 million contracts. Around 3.8 million of the new contracts were small loans of less than 1,000 euros. In almost 98 percent of cases, installment loans are repaid as agreed. Nevertheless, Schufa board member Ole Schröder warned: “Even the repayment of many small loans can quickly lead to financial overload.”
More protection for mini loans
Anyone who wants to take out a loan in Germany usually has to undergo a credit check first. Part of this is often a credit report from a credit agency – such as Schufa. The check is intended to give banks and savings banks information about how high the risk is that a borrower will not repay a loan. Small and short-term loans of up to 200 euros are exempt from such a check – for now.
The EU Consumer Credit Directive, which came into force on October 30, 2023, also provides for an examination before granting such loans. In the future, anyone who borrows money from the bank should be given more understandable information about what it costs. The aim is to protect low-income households in particular from excessive debt. EU member states must implement the requirements into national law by November 20, 2025.
Consumer advocates: Seize opportunities offered by new EU regulations
The Federal Association of Consumer Organisations and the Institute for Financial Services (iff) have drawn up proposals on how the Consumer Credit Directive could be implemented in Germany. The opportunity is to “improve the legal framework for the granting of consumer credit in the long term,” argues the vzbv.
In order to protect consumers from over-indebtedness, the vzbv calls, among other things, for the following points to be laid down in law:
– Before a loan agreement is signed, banks should be required to check the income and regular expenses of consumers – even for mini loans. “Especially with loans with a small amount or short term, a particularly high risk of over-indebtedness must be assumed, which is why the obligations from existing loan agreements in particular should be taken into account,” warns the vzbv.
– If consumers encounter difficulties in repaying their loans, lenders should be obliged to offer their customers flexible terms before their contract is terminated: for example, a reduction in instalments or a deferral of payment.
In order to take into account both over-indebtedness protection and data protection, the report proposes supplementing the obligation to carry out creditworthiness checks with a strict ban on processing sensitive consumer data. vzbv expert Mohn explains: “The creditworthiness check must be designed in such a way that the individual income and regular expenses are checked for every type of consumer loan, without processing sensitive consumer information.”
Source: Stern
