Living in the red
Written by: Tomáš Skřivánek (www.penize.cz)
Photo by: Petr Poliak
While interest on loans is declining
steadily, low interest rates mean it doesn't pay to keep money in
the bank. Thus, the current trend is to live on debt.
During the last two years banks' relations with ordinary clients
who don't need to borrow tens of millions of crowns or don't have
similar sums of cash on hand have changed radically. While a client
requesting "only" a loan for a new car, a vacation, or
a living room suite was unwelcome in banks ten years ago, today
he has become the center of attention.
This lucrative segment is attractive to the banks, as well as many
finance companies, the three largest of which - Multiservis, Home
Credit, and Cetelem - last year earned over CZK 10 billion. Universal
products that make permanent indebtedness possible are increasingly
popular. "Client interest is quickly shifting from consumer
loans to more flexible credit cards," says Jiří Pathy, head
of GE Capital Multiservis, the largest finance company. "Over
the next four years the Czech market has the potential for another
2.5 million credit cards," adds Pavel Juřík, a payment systems
specialist for Bull. So far finance companies and banks have issued
nearly 1 million cards. The opportunity to go into debt so easily
brings with it the risk of credit misuse, and requires banks and
finance companies to protect themselves against possible fraud.
That is one reason why such practices as credit registers are currently
being set up (see sidebar p. 58).
Western Europe recently went through a development that we can expect
here. In the nineties, the invasion of American finance companies
with individualized credit cards and consumer loans, accompanied
by aggressive marketing and addressing clients, bore fruit in the
form of decent market shares in the UK and France. The American
harbinger that will soon be followed by others, is the Household
bank, which has opened offices in the Czech Republic and Hungary
this year. The Czech branch, under the Beneficial brand, began offering
consumer credit loans at the end of June, and plans to introduce
credit cards later.
Enticing credit cards
Credit cards are currently going through the greatest boom. This
spring alone the options have practically doubled, to over a dozen
offers. Why is this noteworthy? If you pay with an ordinary payment
card in a shop or restaurant or take cash from an ATM the transaction
will be immediately deducted from your account. Conversely, a true
credit card is not tied to the balance in your account at all. You
can spend with it all month and then you will have another two or
three weeks without interest to pay for your purchases through a
simple bank order or a postal money order. In other words, you can
live on your debt for an entire month without paying anything extra
Credit card issuers use this interest-free period to attract new
customers. Most people expect to pay everything off each month,
and to save money thanks to needing less in their accounts. Unfortunately,
on average, two-thirds of credit card holders will sooner or later
start drawing on their credit, and that's not cheap - with most
credit cards the annual interest rate ranges between 19% and 26%.
The advantage of loans against credit cards is that you determine
the size of your installment payments yourself, but you do have
to send the bank at least one-tenth of the amount owed each month.
Obtaining a credit card takes about a month, and anyone with an
average income can get one with a monthly limit of CZK 20,000-30,000.
The largest credit card issuers are Citibank and HVB Bank, but all
of the larger banking houses already offer them as well. Non-banking
issuers include Multiservis, CCS, and Home Credit, among others.
One final bit of advice: never use a credit card to take cash from
an ATM, because you will be charged interest immediately.
SINCE January 2002, a law that orders providers to
publish the true prices of their loans has been in
force. The price of loaned money is designated by
the abbreviation RPSN. These four letters mean Annual
Percentage Rate of Costs. The rate covers not only
interest on the loan, but also all other costs connected
therewith. Look around carefully in the shop or bank,
or just ask. Every shop or bank is obligated to inform
you of its RPSN. Thanks to RPSN, you can easily compare
Consumer loans: who's giving them?
You don't have enough cash or a credit card just now, and you've
seen an offer that strikes you as excellent. You probably need to
apply for a consumer loan. At first glance loans from finance companies
appear inexpensive - you make ten installment payments (the most
common loan product) and pay only an additional 10%. But look out
- that one tenth, converted to annual interest, is no longer just
one tenth. When you add on fees for closing the contract, for maintaining
the loan, or for statements, your annual interest rate can exceed
30% (see sidebar).
Consumer loans offered by banks are up to 50% cheaper. The best
of them charge just a bit over 10% per annum. "Finance companies
don't know their loan applicants' histories as well as the banks
do, so they must reflect their higher risk in their prices,"
explains Pavel Ráliš, the marketing director for CCB Credit, one
of the finance companies currently jumping into the market. The
greatest disadvantage of bank consumer loans is the long time it
takes to set them up. However, if you have at least a slightly above-average
salary, you're over 25, and your commitments aren't too great, it
should be no problem to take out a loan of up to CZK 100,000.
The saying that time is money applies especially to consumer loans.
While you can arrange a loan from firms such as Home Credit, Multiservis,
and Cetelem right in a shop in just a few minutes, the relatively
lengthy process in a bank has the advantage of lower interest payments.
However, the arrival of new players and the rapid development of
credit cards are forcing finance companies to offer their loans
at competitive interest rates.
Thanks to this competition, all types of loans to individuals will
very soon become more affordable. Certainly good news for those
of you who are able to make proper use of loans in your family budget.
registers - a way to keep debtors in line
CREDIT REGISTERS are common around the world, making it possible
to provide banks with basic information primarily on a loan
applicant's possible debts and payment history, so as to better
calculate loan risk.
Two debtor registers will soon be available in the Czech Republic.
Since the beginning of June, five banks have offered a Common
Loan Register for Individuals. Member banks of the Czech Banking
Credit Bureau association that operates the register are Česká
spořitelna, ČSOB, GE Capital Bank, HVB Bank, and Komerční
banka. At the beginning approximately 1.5 million bits of
data on 900,000 clients will be available. Another eight banks
and are expected to join them later.
The second register is being prepared by the Czech National
Bank along with the Czech Banking Association. The register
went into trial operation at the beginning of May under the
name Central Register of Loans. The Czech Republic is one
of the first countries in central and eastern Europe to have
such a register, which will be loaded with data compiled on
business subjects. The only country in this region with a
functioning register is Poland, and preparations are underway