The volume of ‘revolving’ loans is returning to pre-pandemic levels, with average interest rates above 18%
The savings accumulated during the pandemic are not enough for Spanish families to cope with the price increases caused by the energy crisis. With inflation skyrocketing to 10.8% in July, households with lower savings rates have in recent months opted to increase their debt as a formula to cope with higher spending, with a notable rise in consumer credit involving products such as mini-credits. , easy loans or ‘revolving’ cards are gaining prominence again. The upward evolution of the latter is especially surprising, after years of many lawsuits that significantly reduced their presence in the banking window.
Data from the Bank of Spain shows how the amount of new ‘revolving’ credit transactions reached 11,419 million euros in June. A figure that represents 13.5% more compared to the 10,000 million of December 2021. The data also exceeds all volumes recorded month after month last year. And also the 11,395 million that this type of loan represented in February 2020, just before the outbreak of the pandemic and the important Supreme Court ruling that the interest rates applied by these cards were “significantly higher than the normal interest money.
The ‘revolving’ is a type of card in which the user has a certain credit limit, which can be repaid in installments, via periodic installments. According to reports from the Bank of Spain’s Banking Client Portal, these fees can be set as a percentage of existing debt or as a fixed fee. Periodic payments that the customer can choose and change within minimums set by the entity.
What is special is that the debt derived from the credit is ‘renewed’ on a monthly basis. That is, it decreases with the installments made through the payment of installments, but it increases with the use of the card (payments, cash withdrawals, etc.), as well as with the interest, commissions and other expenses generated co-financed.
This feature has its consequences. On the one hand, if a low monthly installment is paid in proportion to the amount of the debt, the principal repayment will be made over a very long period of time, which can lead to paying a lot of interest that fatten up like a real ball of snow in the time.
The problem is that this interest rate is basically much higher than that of the usual personal loans, and can lead to final debts that consumers can no longer pay. In February 2020, before the first Supreme Court ruling, the average interest rates charged by entities for ‘revolving’ was 19.8% and after the ruling it fell by almost a point to 18.9%.
According to the latest available data, the rates applied at the end of June were on average around 18.15%, according to the Bank of Spain. And in some cases even more than 20%.
If all consumer loans are included, the outstanding balance at the end of June stood at 187,950 million euros. The figure is 5% more than at the beginning of the year and this percentage increase is based on this growth in personal loans and ‘revolving’ due to the financing needs of, for example, summer holidays.
The problem is that this situation comes at a time when, according to the regulator’s latest Financial Stability Report, lending criteria and terms and conditions have tightened “in general” in the second quarter of the year, with the expect this trend to continue in the coming months.
It’s the whiting biting its tail. The Bank of Spain warns that lower-income households have already started using their savings to cover basic expenses, given the need to allocate most of their budget to energy bills.
And it also warns that the proportion of lower-income households in debt is higher than the higher-income group, “so the ability to repay their debts would be relatively more affected by a rise in energy prices.” ».
In other words, in the financial sector there is already a certain fear of a revival of delinquency among this group. A situation that banks cannot afford after keeping their defaults at bay during the past two years of the pandemic. Faced with the worst omens of peaks in defaults of more than 10% at the start of the health crisis, the figure fell to 4.18% in May, the lowest level since January 2009.
The challenge is that a potential increase in consumer credit delinquencies does not spoil the trend. That of the banks and that of the customers with the greatest debt themselves.
In this scenario, the Confederation of Consumers and Users (CECU) warns of the need to take measures to protect the “most vulnerable” consumers against high inflation and against this tightening of access to credit, which in many cases leaves this group “alternatives”. could search. tougher terms such as revolving and fast credits”.
The ‘revolving’ cards have been one of the major legal problems for Spanish banks in recent years. Following the recent Supreme Court rulings, the entities have changed their strategy to seek agreements with customers and avoid new lawsuits, while drastically reducing their offerings in this type of credit. But many claims for possible usury or lack of transparency in the signed contracts are still open in the courts. “Because the Supreme Court has not set the exact threshold for a specific interest rate to be considered usury, the demands continue to multiply and every sentence is different,” sources at the law firm Hogan Lovells explain.
It’s true. Since 2015, the High Court has issued three major decisions to determine which interest can be considered to be unlawful. But no one gave an exact figure. In addition, in its most recent ruling, on May 4, it ruled that an APR of 24.6% charged in 2006 was not a user, as there were other entities charging similar rates at the time. The same magistrates declared in 2020 that 26.8% was wrongful in another lawsuit. And in the 2015 ruling, the criterion for classifying usurious interest was between 14% and 18% (double the average interest rate on consumer credit, which was then between 7% and 9%).
At that time, the entities resorted to because consumer credit included other cheaper ones, such as personal credit. This is why the Bank of Spain has produced a new statistic for ‘credit cards and revolving’ since 2011, which has been used by the Supreme Court in its ruling in 2020. However, there is still a gap for contracts pre-2010. Banks criticize that this new statistic is calculated under the TEDR type, which does not include commissions and therefore results in lower costs than if the calculation were made with the APR, the data they believe should prevail determines whether the interest of a ‘revolving’ is usury .
Source: La Verdad
I’m Wayne Wickman, a professional journalist and author for Today Times Live. My specialty is covering global news and current events, offering readers a unique perspective on the world’s most pressing issues. I’m passionate about storytelling and helping people stay informed on the goings-on of our planet.
