Loans Given in Small Payments Over Time - Consumer protection groups fight for additional safeguards against excessive debt.
"Buy now, pay later" - Shop with ease, pay later on. The practice of purchasing items on credit is on the rise, and it's becoming more popular than ever. However, many consumers end up spending more than they can afford, resulting in financial strain. The Consumer Central Federation (vzbv) is concerned about this issue and advocates for better protection for individuals during the credit application process.
In a survey conducted by vzbv, 19% of 1,000 participants reported having difficulties paying off loans. This percentage is even higher among the 16-29 age group, with 31% facing problems.
Dorothea Mohn, the team leader for financial markets at vzbv, expressed her concerns, saying, "Credit can help consumers buy expensive items like cars or kitchen renovations or even bridge financial gaps. But we're seeing that banks are increasingly approving loans that lead to financial difficulties for consumers."
Installment credit and its dangers
The lure of "buy now, pay later" is attractive to many consumers, especially with the promise of zero-interest rates. However, the vzbv cautions that the emergence of new credit forms like Buy-Now-Pay-Later, which enable quick financing for online purchases, can be deceiving. These loans can easily lead to financial problems by overwhelming unsuspecting borrowers.
According to Schufa, the number of new installment loan agreements in Germany in 2022 has increased drastically - by 30% compared to the previous year. Approximately 3.8 million of these new loans were small loans under €1,000. While most of these loans are repaid on time, Schufa board member Ole Schroeder cautions, "Even repaying numerous small loans can quickly result in financial overload."
More protection for mini-credits
In Germany, the process of obtaining a loan usually involves a creditworthiness check. This procedure typically includes a credit report from a credit bureau like Schufa. However, mini-credits (loans up to €200) have been exempt from this requirement. Thanks to the EU Consumer Credit Directive, which came into effect on October 30, 2023, this is about to change.
This directive mandates a creditworthiness check before approving loans below €200. The borrower needs to be informed about this during the loan application process. The goal is to safeguard low-income households from an overwhelming amount of debt. By November 20, 2025, EU member states must implement these requirements into their national legislation.
Consumer advocates propose implementing the directive in Germany
The Consumer Central Federation (vzbv) and the Institute for Financial Services (iff) have devised strategies for implementing the EU Consumer Credit Directive in Germany. They believe that it can improve the long-term conditions for obtaining consumer credit while protecting customers from financial distress.
The vzbv proposes the following measures to prevent over-indebtedness:
- Before signing a credit agreement, banks should be required to assess the financial capacity of their customers - even for small, short-term loans. Mohn urges, "With credit agreements of low amounts or short terms, a particularly high risk of over-indebtedness should be assumed and the existing credit contracts taken into account."
- For borrowers experiencing financial difficulties, creditors should be compelled to offer more lenient terms before terminating the contract. This could include reduced rates or postponement of payments.
Considering the need to balance over-indebtedness protection and data security, the expert opinion suggests implementing an obligation to check creditworthiness while restricting the use of sensitive consumer data. Mohn added, "The creditworthiness check must be designed in such a way that, regardless of the type of consumer credit, the individual income and regular expenses are checked without using sensitive consumer information."
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The EU Consumer Credit Directive, set to be implemented in Germany by 2025, will require a creditworthiness check for loans under €200. This is a concern for banks, as many installment loans for cars and other small purchases are handled in this manner. The Federation of German Consumer Organizations (vzbv) and the Institute for Financial Services (iff) believe this directive could improve credit conditions, prevent over-indebtedness, and protect consumers.
Under the proposed measures by vzbv, banks must assess a borrower's financial capacity before approving even small, short-term loans. Furthermore, creditors should be obligated to offer lenient terms to borrowers facing financial hardship, instead of terminating contracts. This could involve reduced rates or a postponement of payments.
Schufa board member Ole Schroeder warns that numerous small loans can quickly lead to financial overload, as the number of new installment loan agreements in Germany increased by 30% in 2022. The advocate Dorothea Mohn is worried about banks approving loans that result in financial difficulties for consumers.
Consumer advocates in Germany propose implementing the directive while balancing over-indebtedness protection and data security. The creditworthiness check must consider an individual's income and regular expenses without using sensitive consumer data, as per the expert opinion.
In France, consumer credit organizations are also concerned about financial protection for individuals. In Berlin and Frankfurt, the officials from the German Consumer Advocate Association (vzbv) are working diligently on adapting and implementing these new regulations for German consumers.
