In September of next year, it is most likely that no quick loans may have a higher interest rate than 40% plus the reference rate. In the near future, the government will put forward a bill in the Riksdag that will in all likelihood be voted through. This has of course been praised by the media, but many believe that an interest rate of just over 40% is still too high, but is it really? And will the interest rate ceiling make the quick loans cheaper or not? We shall discuss these two issues a little now.
Is 40% in interest okay?
We know that it is easy to stare blindly at the effective interest rate and then 40% seems to be extremely high. And of course, if you take out a loan of a few hundred thousand USD that you pay off for years, it is pure ocher. Not to mention how extreme it would be if mortgages had such a high interest rate, because then even 4% is extremely much in the current situation.
It’s no wonder that people often have the effective interest rate on their heads as most loans are quite large and have a long repayment period. Then the effective interest rate is a reasonable measure of how expensive or cheap a loan really is and works well when you want to compare loans. But this does not work with regard to fast loans and sms loans because many of these loans have a maturity of less than one year, and in addition they are small.
It is, among other things, the maturity and the amount of the loan that affect how high the interest rate a loan gets. If a loan of USD 100,000 would have an interest rate of 40%, it would have a loan cost over USD 100,000 if it was repaid over 5 years. This would mean that the loan cost will be higher than 100% of the loan size. And it would be almost useless.
However, a sms loan of USD 4000 with an interest rate of 40% would cost around USD 800 if it is repaid monthly for 1 year, and that is “only” 20% of the amount you borrowed. It doesn’t feel as unfair at all. In addition, you can always redeem their loans early, so even if you take out a loan of USD 4000 with a 1 year maturity, you can make extra mortgages and get rid of it already after a month. Then it will only cost a few hundred dollars.
Rather, such a small loan must have a fairly high interest rate for it to be profitable for the lender to lend money. For example, an interest rate of 5% for such a small loan would only result in a loan cost of just over USD 100. There is no fast lender that would get their business going around with such a low return. It can certainly work for lenders of private loans, but only because they also lend large sums of money.
Not sure that quick loans will be cheaper
As you can see, a 40 percent interest rate must be so dangerous, unless the loan amount is small and the maturity is short. However, there is a risk with an interest rate ceiling of 40%. If the interest rate ceiling is introduced, there are certainly some lenders who are attracted to settle around 40% and then offer rather large loans with long maturities.
If this happens, a loan amount of USD 50000 which is repaid in 5 years would cost more than the loan itself. That in itself will not work because fast loans will not cost more than the loan amount when the new rules are introduced, but even 100% in loan cost is not cheap exactly.
So, will fast loans be more expensive or cheaper? It is not at all as secure as you may understand. Sure, we won’t see any effective interest rates of several hundred percent (plus reference rates), but that doesn’t necessarily mean that the loans will actually be cheaper. What will probably happen is that the short monthly loans turn into annual loans and then it is not certain that they will be cheaper if you look at the total cost for them.