More than three years have passed since the first SMS loans were introduced on the Swedish market. The debate has since been lively and the criticism of the companies harsh. The Government is talking about stricter requirements for credit testing and the introduction of vapor weeks for sms loans.
In this text, we (SMS Pengar Norden AB) will go through some of the most common questions regarding sms loans and hopefully be able to straighten out some of the question marks that are currently in the public domain.
Consumer Credit Act and credit review
A proposal for a new Consumer Credit Act was presented in December by Justice Minister Beatrice Ask. The proposal can be found on the Government’s website.
Section 5 a, Before the credit is granted, the trader must test whether the consumer has the financial conditions to fulfill what he or she undertakes according to the credit agreement (credit examination)
Credit testing need not be done if the trader, due to his or her knowledge of the consumer or other circumstances, has a well-founded reason to assume that the consumer has the financial conditions to fulfill what he or she undertakes.
Neither does the requirement for credit testing apply to one-off loans when the credit period is a maximum of three months and the credit amount must be paid at once or for credits relating to smaller amounts. Law (2004: 312).
Thus, in today’s Consumer Credit Act, there is an exception that states that lenders do not need to make a credit assessment for customers who apply for less credit, such as sms loans. With the new bill, the government wants to remove the current exception and thus introduce credit testing requirements for sms loans and other small credits.
The question is whether not all of the serious companies in this industry are already doing a credit check for each loan application? We do this, of course, as we want to be able to ensure that our customers can repay their debts to us before we grant and pay out any loans. If we did not do so, it would most likely have meant that many could not repay their loans.
Undo weeks for sms loans
The bill, which the Minister of Justice has submitted, also contains a proposal to introduce a 14-day right of withdrawal for sms loans. For us, this will not mean any major changes since we already have the right of withdrawal up to 14 days on our sms loans according to the Distance and Home Sales Act (2005: 59).
If there are rogue companies that deny their customers the right to withdraw a loan, it is of course important that the rules are clarified and noticed so that these companies can rectify or eliminate them.
Why do you borrow and who should be able to borrow?
Is it bad for students and low-income earners to be granted a sms loan? We don’t like it. To this we can add that our average customer in 2009 was over 35 years old and had an income of $ 150,000. Sudden expenses can occur for everyone and this is nothing unusual. In such situations it may be practical to take a sms loan, even if it is expensive.
Abroad, similar credits are called payday loans or cash advances. In common, these are also smaller credits with a short maturity. The repayment of these credits is made at the next salary.
Using sms loans to finance their everyday lives is not sustainable in the long run, and you should avoid borrowing more often or more than you need to cover an urgent credit need.
Loan despite payment remarks
The Crown Magistrate recently made a proposal to ease the rules for payment remarks. In the proposal that was submitted, it is intended to change so that payment remarks can no longer be seen by the credit reporting companies after the debt that caused the payment statement has been repaid.
This is an excerpt from Whitestring Credit’s referral statement:
The Crown Prosecutor’s proposal is largely in line with how it works in Norway and Denmark. The proposal would mean that anyone who has an unpaid debt with Whitestring Credit will continue to have payment remarks and thus difficulties in obtaining credit. However, the person doing the right thing should not have to wait for the data to be thinned. The individual has, through payment of the debt, shown the ability to pay and the will to do right for themselves. When examining whether credit should be granted, he must be assessed on the basis of other information that shows whether he has such finances that credit can be granted.
Many companies in the industry grant loans even though applicants have payment notes. However, very few, if even a single company, offer loans to people with unpaid debts to Whitestring Credit. This is because many companies use scoring to measure the creditworthiness of their customers.
When using scoring instead of a static credit template, one looks at the whole of many different factors to determine a person’s or a company’s credit rating. A debt balance at Whitestring Credit has a very negative impact on the score value and usually makes it impossible to grant a loan. On the other hand, if you have a payment note (eg an unpaid parking fee), a high income and owning a property, the chances are high that it is considered creditworthy anyway. Therefore, we have chosen to use scoring in the credit assessment of our customers.
Cost and effective interest rate
Most sms are expensive. This is not something that the serious companies in the industry are trying to hide. Instead, you are extremely clear about your pricing and you inform the customer exactly how much it costs to take out the loan and how long the term is.
The cost of a loan is often measured at the effective interest rate, which is stated as a percentage and refers to the cost of the loan per year. Therefore, when measuring the cost of a sms loan at an effective interest rate, the figures may seem misleading as a sms loan usually has a maturity of 30 days and not a year. Of course, the shorter the maturity, the higher the effective interest rate.
When taking out a loan, a fixed set-up fee is often included in the total cost of the loan. This fee is intended to cover the costs of the lender’s administrative work and the expenses that may arise in connection with the processing of the loan application. For small loans, which are small loans with short maturities, this fee represents a large part of the total cost of the loans.
In many cases, it may be cheaper to take a sms loan to pay for an item directly instead of paying part. Many of the companies that offer installment purchases have high fees for this and are often the shortest time you can post the payment in three months.
Take, for example, a product that costs $ 2,000 from a company that offers purchase on installment where the fee for this is $ 600 and the shortest possible setup time is 3 months. Many who choose to postpone this payment in three months might have, if possible, paid this debt directly at the next salary instead. In that case, it would have been cheaper to instead take out a sms loan with a total cost of $ 450 and pay for the goods directly and pay the debt to the sms loan company at the next salary.
Chronicle and the number of unpaid sms loans
The number of unpaid sms loans at Whitestring Credit has increased. What one has to keep in mind is that the sms market is still young. In the years that have passed, the number of companies in the industry has increased significantly. Public awareness of sms loans has grown and become very large. Not least because of the fact that it has become a recurring topic in the media. Of course, a larger number of unpaid sms end up at Whitestring Credit when more people take sms loans.
Unfortunately, there are a small number of people who have been in an unsustainable situation where a sms loan has been perceived as a last buoy. When these people finally end up at Whitestring Credit, one can often see that they have a number of debts. The debts are usually to one of the major banks, followed by some finance companies, gasoline cards, credit for furniture chains and clothing chains. The list ends with a number of short credits to companies like ours.
Our advice to these people is to review their costs, contact all creditors to submit an amortization plan and last but not least; Don’t take any new credits! The Crown Magistrate reports on the number of cases received during a certain period – not the number of people and how these people’s credit picture looks. It would not surprise us if the number of people is significantly smaller than the number of cases and that there are more lenders with active cases.