A year ago or less than that, there were as many lenders offering SMS loans or fast loans (basically the same thing). Today, there are not many people offering these loans in the usual form.
What happened then? Well, simply put, new rules were introduced around so-called high-cost credits, which put a stalemate on many lenders.
The definition of a high-cost credit
Is a credit or loan with an effective interest rate that achieves the reference rate (based on the repo rate) plus 30 percent and in practice this means a nominal interest rate of at least 29.5 percent (since the repo rate is -0.5 percent just now). All loans that exceed this limit are called high-cost credits, and the lender must tell customers clearly.
The Consumer Credit Act introduced new rules that included both an interest rate ceiling and a cost ceiling. The interest rate ceiling means that you can never charge a higher interest rate on loans or credit than the reference rate plus 40 percent. Which is thus 39.5 percent at the time of writing thanks to the prevailing minus interest rate.
The cost ceiling, in turn, means that you never have to pay more in interest and fees than the loan amount is. Thus, if one were to borrow USD 5,000, the total cost of that loan or credit should never exceed USD 5,000. This includes interest, fees (planning fee and management fee), late interest and collection costs.
A high-cost credit
Must always be associated with a credit check on the applicant. It was recommended earlier, of course, but not a must for loans with short maturities and smaller fees. The lenders (who offered, for example, SMS loans and quick loans) could choose for themselves and perhaps occasionally pass through people who should not have been approved.
Another thing that was decided in the law was that you can only extend a loan of this type once. The only times you can avoid this are if the extension is free of charge to the consumer or if you have created a sensible repayment plan that aims to give the borrower a good chance of paying off his loan.
Finally, the rules for marketing became a little stricter as you first and foremost have to say that what you offer is a high cost credit and also you have to inform about the risks of borrowing and how to contact someone to get help with their debts and questions. On top of this, marketing must also be “moderate”, factual and balanced and not intrusive.
Exactly what this means can be thought of, but of course this entails some limitations in advertising, for example, where many lenders who offered SMS loans previously used to resort to rather poor advertising which encouraged borrowing for the wrong reasons.
Hit many lenders
The new rules in the Consumer Credit Act seem to have hit hard on lenders offering traditional SMS loans and fast loans. These loans are usually of the kind that offer from around USD 1,000 to 10,000 (sometimes USD 20,000) with a short repayment period, such as 30, 60 or 90 days.
This type of loan has long been called too expensive and it is quite clear that it is not so cheap to take an SMS loan. This is something that we would normally recommend to avoid, unless it is a very short-term and urgent need that you know you will be able to pay back within a few months. And where you are perfectly ok with paying the fairly high cost such a loan entails.