Bafin discovers shortcomings in consumer loans during inspections.

Financial Matters - Bafin discovers shortcomings in consumer loans during inspections.

The Bafin, Germany's financial supervisory authority, has brought to light some problems in the way consumer loans are granted. An article published in the "Bafin Journal" on Wednesday revealed that almost 80% of loan applications from the examined banks or financing partners of retailers were approved in a sample survey carried out in late summer 2023. Surprisingly, half of those who applied had bad credit ratings.

To carry out this study, Bafin employed mystery shoppers who pretended to want to finance furniture, electrical appliances, or clothing purchases. In total, 48 tests were conducted at four online stores and two physical retailers with their respective financing partners, as well as at two banks directly. The shoppers successfully secured financing or loans that were later revoked.

The main worry was that these testers felt insufficiently informed about the loan they were applying for. The article notes that they complained because "advisors did not explain all product features, did not go into enough detail about the person's situation, seemed uncertain, and ended consultation talks too abruptly."

Although the Bafin emphasized that the sample was small and only a snapshot, it still provided an intimate look into the workings of the market. In most cases, the interest rate and loan length in the agreed-upon loans matched those advertised. However, in some cases, it wasn't clear that the advertised favorable conditions came with certain restrictions, such as a specific term.

In about a third of the test purchases, the testers weren't even asked about their financial situation. In other situations, this inquiry was very superficial. Information about income and expenses like rent and living costs was requested in half of the applications. Only 17% of the test purchases had the lenders asking about pre-existing loans.

The Consumer Central Association (vzbv) is now advocating for better protection of consumers during the loan application process. As stated by Dorothea Mohn, senior financial markets team leader at the vzbv, "Credit can help consumers make major purchases like a car or kitchen renovation or help them through temporary financial difficulties. However, we're seeing that banks are giving out loans that lead to financial trouble for consumers."

Interestingly, the bank advertisements were found to be mostly honest and transparent in a second mystery shopping action. This investigation focused on the online ads, apps, and social media profiles of ten German banks and savings banks between June and October 2023, primarily looking at the promotion of regulated investment funds. The Bafin has been carrying out many such investigations on a variety of financial topics since 2021.

Read also:

1. Despite the issues highlighted by Bafin in consumer loans, Frankfurt am Main remains a significant hub for banks and financial institutions in Germany.
2. The high approval rate for loans with bad credit ratings could contribute to a deficit in the finances of many consumers, leading to an increased demand for consumer credit.
3. Bafin's discovery underscores the need for more stringent checks on loans for furniture, electrical appliances, and clothing purchases, as these are common consumer purchases requiring credit.
4. The Federal Financial Supervisory Authority has been advocating for improved financial supervision and transparency in the banking sector to shield consumers from potential financial burdens.
5. If consumers are not sufficiently informed about the terms of their loans, it could result in unpleasant surprises later on, such as hidden fees or unfavorable loan conditions.
6. Some banks and financing partners might be focused on expanding their business reach and securing new loans, potentially disregarding the potential risks to consumers causing financial distress.
7. Germany's financial supervisory authority and the Consumer Central Association are working together to promote more responsible lending practices, ensuring a more balanced distribution of financial services in the country.
8. Bafin's ongoing investigations into various aspects of the financial sector not only help in maintaining the integrity of the system but also provide essential insights for consumers seeking credit in Germany.

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