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Credit culture comes of age
Written by: Kristýna Havligerová (www.penize.cz)
Photo: Petr Poliak, Jan Vágner
More than ever before, Czech consumers
are taking out consumer loans, buying goods on installment plans,
using mortgages to pay for apartments, and buying cars through
leasing plans. But indebtedness can be a rude awakening.
Olga Pazderová & Jaroslav
Photo: Petr Poliak
LAST YEAR INTEREST for loans and mortgages fell to all-time lows.
Banks finally became properly involved in providing loans, and
the tough battle for clients led to easier conditions and broader
offers of loans. It is easier to take out a loan or get a credit
or payment card, and most of those who have succumbed to consumer
fever are taking advantage. "While in 2002 the number of loans
we provided rose by only 70% or so, last year they were up 210%," says
Dana Tomášková, director of the marketing and communications department
for CCB Finance, a loan and leasing company. So it's natural that
people are spending more than they used to: last year per-household
consumption was up 7.3% year-on-year.
However, household indebtedness is rising more rapidly than consumption.
At the end of 2003 each of the nation's ten million citizens was
indebted to the tune of about CZK 20,000, and excluding children
and pensioners, the per capita figure jumps to CZK 42,000. But
compared to household indebtedness in other European countries,
Czech consumers still lag behind. While in this country the ratio
of provided loans to household revenues is about 20%, in the EU
it often reaches 70-80%. According to economists, what is alarming
is not the amount of purchases backed by loans, but rather in the
speed at which indebtedness is rising. There is also danger in
the fact that local consumers don't have much experience with going
into debt. They often fail to foresee that they could find themselves
in situations where they would be unable to repay their debts or
that interest rates could spike.
Banks guarantee lower interest
by: Jan Vágner
Some of the least expensive ways to take out a loan are setting
up an account that allows overdrafts, taking out a consumer loan,
or acquiring a credit card. Overdrawing on a current account,
a so-called "kontokorent", is meant mainly for clients
who want to borrow small sums, usually between twenty and fifty
thousand crowns. With an interest rate of 12%, a kontokorent
provides one of the less expensive loans, but it has two drawbacks.
First is the obligation to carry a current account with the bank
for a certain period of time. Second is the limited amount, which
depends on a customer's regular income.
For consumers who want to borrow larger sums, the banks offer consumer
loans. Options include the specific loan, which the bank provides
for the purchase of specific goods, or the non-specific loan, which
can be used to buy anything. "Over 80% of our clients prefer
non-specific loans," says Jaroslav Veselý, ČSOB's product
manager. "They don't have to document the purpose; we just
give them loans once they've proved their income. True, interest
rates for specific loans are lower, but customers are put off by
the obligation to submit documentation showing that the money was
used for the purpose set forth in the contract," he explains.
Among Živnostenská banka clients, specific and non-specific loans
are about equally popular. According to Petr Víšek, head of product
development and management, it depends on what the client needs
the money for. When clients want to buy cars they generally choose
specific loans, because of the lower interest rates; when they
want to buy several smaller items yet avoid the paperwork, they
go for non-specific loans.
Just a look at the numbers can provide a good idea of the popularity
of consumer loans. In the case of ČSOB, which last year conducted
a massive campaign advertising its consumer loans, the total grew
by nearly 90%. In 2001, when ČSOB started extending consumer loans,
it granted 14,200. In 2002 it granted 25,500, and last year nearly
50,000. "In recent years interest in consumer loans has shown
stable growth," says Tomáš Halla, Česká spořitelna's loan
department director. "Over the last five years, we increased
the amount of consumer loans provided by a factor of 2.5, and last
year we granted 258,500 new loans."
Any citizen between the ages of 18 and 60 can apply for a loan,
but it is mainly young people who want them. "However, there
are often problems with income levels among younger clients," notes
ČSOB's Veselý. "So we usually grant loans to young families,
combining the earnings of both parents." And how much do you
have to earn for a bank to accept you? "In general, banks
used to grant loans to clients earning CZK 15,000 to 20,000 gross.
Now the limit has been dropped at some banks to CZK 10,000," Víšek
Anyone who wants to always have easy access to a loan can arrange
for a credit card. In May of 2000 HVB Bank began issuing the
first credit cards for the masses under the Maxim name, and thanks
to its success it wasn't long before other banks followed suit.
Today most banks offer credit cards, and those that still don't
have them in their product portfolios are planning to launch
them this year. A credit card loan usually ranges from tens of
thousands to a hundred thousand crowns. Card holders use them
just like ordinary payment cards - in shops or to withdraw money
from ATMs. What makes credit cards so magical is the so-called
grace period, generally from 40 to 45 days. You use the card
to make payments all month, and the next month you get the bill.
You then usually have another two weeks to pay the owed sum without
incurring any interest. So, while you get money for a few weeks
at no charge, the bank does charge card-holder fees - which,
in some cases, are considerable.
Even despite higher prices and fees, credit cards have begun coming
into vogue. "We've been offering credit cards only since 2003.
Last year we issued 7,100 cards, and we're recording double-digit
growth each month," remarks Olga Pazderová, ČSOB's product
manager, recounting the success of this newly launched product.
Česká spořitelna also rates the development of the number of its
credit cards as a success. According to Marie Hešnaurová, the director
of card program sales policy, in 2001 her bank issued 5,000 credit
cards, then 27,000 in 2002, and last year 100,000. "Typical
card-holders are mainly younger people who are amenable to buying
through loans. 70% of the credit cards are electronic, and clients
use them mainly as financial reserves for larger purchases," she
For more demanding clients, the banks offer above-standard credit
cards usually called "gold" cards. These clients can
also acquire exclusive American Express or Diners Club cards. "The
advantage is very high quality travel insurance and various additional
services like access to VIP lounges at airports," explains
Eva Kárníková, director of Diners Club Czech Republic.
Banks versus loan companies
Banks aren't the only institutions that offer consumer loans. You
can also borrow from loan companies that offer loans right in shops.
If a customer is trustworthy, he can get a loan within thirty minutes
and take the goods home. Another advantage is that the client pays
no fees for applying for the loan or maintaining a loan account,
as is the case with banks, but the interest will be higher. Loan
companies also offer something like credit cards, called loan cards.
However, as is the case with installment plans, owners must settle
for high interest on their loans, with no grace period, and the
cards can be used only in the Czech Republic.
Jan Vraný, Raiffeisenbank's director for private banking, sees
an advantage in non-specific consumer loans from banks. For example,
if a client wants to buy a home video theater and uses an installment
plan, he has to choose his equipment exclusively from a given vendor. "When
a consumer borrows money from a bank, no one but the bank involved
knows that he is buying on credit. With installment plans both
the loan company and the vendor know," Vraný explains. "One
advantage of installment sales is speed, but sometimes the client
might have to wait until the next day for the loan to be approved," he
adds. Speed is usually the main reason to opt for loans in shops
despite higher interest rates. "Consumer loan companies don't
have the financial backing that the banks have. They borrow their
money on the financial market, which means they're more expensive
than banks and the interest rates are higher," Víšek points
Housing loans multiplying like
In the last few years the mortgage market has been growing by 70-90%
on average each year. While at the end of 2000 Czechs held 29,560
mortgages, at the end of last year they held 71,130, worth over
CZK 73 billion. Why is the number of mortgages growing so rapidly?
There are several reasons, including: the growing purchasing power
of the citizenry; the artificially evoked hysteria caused by concerns
about real estate price increases after EU accession; and, especially,
record-low interest rates. In 1997 the number one player on the
market at the time, Českomoravská hypoteční banka (ČMHB), charged
a minimum rate of 14.9%, while today rates are 10% lower. Also
of importance is the change in lifestyle. "We are providing
most of our mortgages for single-generation family homes. And in
the future we expect that the greatest interest will be in mortgages
for family homes, later followed by apartments," says Jan
Sadil, ČMHB's general director.
Jiří Doubravský, director of the real estate financing division
of Majordomus HVB Bank, also confirms the growing popularity of
mortgages. In the past Majordomus mortgages drew clients mainly
from the upper income groups, often foreigners. "But mortgages
are becoming ever more a product for the masses, and our goal is
for them to be affordable to the broadest possible portion of our
citizenry," Doubravský explains. In 2002 mortgages accounted
for approximately 3% of the GDP in this country, while the average
in EU countries was over 30%. "We anticipate that over the
next 10 years we'll reach the level of 15% of the GDP," Sadil
The number of loans from building savings accounts is also on the
rise. In 1996 building savings banks provided a total of 18,720
ordinary and bridge loans. Four years later, they granted 102,385
loans, and in October 2003 the 2002 record of 131,000 loans was
passed. At the end of 2002 the amount of money people took from
ordinary and bridge loans from building savings accounts exceeded
CZK 45 billion. As of the beginning of this year, building savings
plans aren't as advantageous as they once were. This means that
the number of loans will rise, because that's the only way building
savings institutions can attract new clients.
Low interest rates, plentiful offers of various options, and the
trend towards living in debt mean that Czech household indebtedness
will rise rapidly this year as well. But it will be necessary to
pay great attention to not becoming engulfed by various loans.
know everything about you!
It's not easy these days for a client to
fool a bank or a finance company. Several years
ago Jiří Havlíček took out a mortgage, and a year
ago he also became indebted to another bank when
he took out a specific-purpose loan for furnishing
THIS YEAR his wife is celebrating a major birthday,
so Havlíček wanted to make her happy by buying a
trip around the world. But because he is paying off
both his mortgage and the loan, he didn't have the
cash for such an expensive present. He decided to
try to take out a loan from a competing bank. However,
fearful of owning up to his other debts, he failed
to mention his loan in the application form. When
he went to receive the bank's decision an unpleasant
surprise awaited him - his application was rejected.
The bank had screened him in the Credit Registry
and discovered that his application wasn't truthful.
The Credit Registry tracks who has loans from individual
banks and how they are doing about repaying them.
The information system offers not only a view of
a client's current debts, but also his credit history
over the last four years. The register also records
loans not approved, so Havlíček complicated his life
for the next few years with his minor scam. Every
bank will deal far more carefully with any client
whose application has not been approved.
David Vorlíček wanted to buy a new TV set before
Christmas, but he didn't have enough money in his
account. He wanted to take out a consumer loan from
the finance company, but he forgot that he owed a
thousand crowns to another company. Additionally,
he had failed to repay it on time and had received
several reminders. All the finance company had to
do was look at the Leasing Registry to see clearly
that Vorlíček was a problem client, so he didn't
get the loan.
The two registries function independently in this
country, so their data aren't shared. This is because
of legislation that doesn't allow data sharing between
banks and other institutions. Conversely, in other
countries there is usually only a single credit register,
which, besides various loans, also maintains data
on unpaid bills (telephone, electricity, etc.), loans,
or failure to pay off loans from companies that ship
Veronika Sýkorová was furnishing a new apartment and
wanted to buy a high-quality stereo. In the shops she saw
offers made by finance companies, and her bank mailed her
a leaflet describing consumer loans. But she wasn't very
wise about judging the offers.
The baNK advertised an attractive loan offer starting at
just 7.9% interest, while the finance company offered a zero
down payment. But the finance company's offer also had, in
fine print, the note, "RPSN 22.9%". At the bank,
she discovered that due to her economic situation, her loan
would be at 13% interest. Why are the offers so different from
the reality? Banks state the minimum interest rate, which is
generally dramatically different from the actual rate. Hardly
any clients get loans at the minimum rate, as the actual rate
depends on the client's ability to repay the loan. And the
zero down payment that finance companies like to advertise
only refers to the direct payment that the client has to make
up front. The information a client should keep in mind when
choosing a loan is the so-called RPSN - i.e., the annual percentage
rate for costs, which covers all costs connected with arranging
and drawing on and repaying the loan. This is the only figure
you can use to reliably compare various package offers.
leasing - taking precautions
Having your car stolen is always unpleasant. And if
you bought your car under a leasing agreement you'll face
the main question: how much is this going to cost me? Unfortunately,
most people don't ask this question until after their car
has been stolen - instead of when they are closing their
SUCH WAS THE CASE of Bohumil Kubíček, who bought a Škoda Octavia
worth CZK 669,500 on leasing. He made a down payment of CZK
133,900 and undertook monthly payments of CZK 15,434. He used
his car and made his payments regularly until it was stolen
a year later, after 12 payments had been made. Kubíček reported
the theft to the police, the insurer, and the leasing company.
The insurer appraised the year-old car at CZK 500,000, and
since the car was never found it paid the half million to the
leasing company (the actual owner). At that moment Kubíček
read with horror his leasing conditions and learned that the
leasing company could deduct from its settlement the entire
sum of his installments plus interest. However, a representative
of the leasing company informed him that this procedure applies
only in cases when there is a suspicion that the theft was
faked. Usually only the car's book value is considered, which
is lower and corresponds to the unpaid value of the car.
Kubíček was lucky, and once the mutual claims had been cleared
the company returned CZK 167,046 to him. If he had been made
to pay the interest on the leasing contract, he would have
only gotten CZK 20,000 back. In other words, if Kubíček had
bought the car with cash he would have lost at least CZK 179,500
(the price of the car, CZK 669,500 plus annual insurance of
CZK 10,000, minus the insurance settlement, CZK 500,000) because
of the theft. So with the leasing arrangement he lost only
CZK 152,016, but it could have been much worse.
great servant, terrible master
Mastering a credit card needn't be difficult at
all, as long as you meet one condition: pay as soon as
you can, as much as you can. Otherwise you could plunge
into a spiral of debt as Anna Malá did. Just spend a little
and make your payments as per the bank's minimal requirements.
ANNA'S ROUTE to "bank slavery" was precipitous.
She got "an offer she couldn't refuse": a free
credit card with a limit of CZK 50,000 with no regular fee,
a monthly interest rate of 1.89%, and mandatory minimal payments
of 5% of the sum owed (but at least CZK 300). She lived modestly,
not over-estimating her financial possibilities, so each
month she spent only CZK 1,000, but she repaid only the minimum,
which was CZK 300 at the beginning. But after seven months
her payments, and her total debt, were rising.
Anna has had her card for two and a half years, and now she
is coming to the breaking point - even with the minimal 5%
payment she is paying the bank exactly as much as she is
spending - i.e., CZK 1,000. If she continues paying just
the minimum and still spends the thousand crowns, in ten
years she will have to repay CZK 1,600 each month, even when
she's spending only a thousand. So in ten years she will
spend CZK 120,000 (1,000 a month), while she will have paid
CZK 146,000 in her installments and her card debt will rise
by another CZK 32,000.
If after ten years Anna decides to stop spending and repay
her debt as she has so far, she'll be paying for seven more
years. After she's repaid her debt in regular 5% payments,
her total payments to the bank over seventeen years will
reach nearly CZK 194,000. But the goods she has purchased
will still be worth only CZK 120,000.
Simona Plischkeová, Petr Vykoukal
by: Petr Poliak
Holding on to your home
If a person runs into problems with his mortgage
payments, it certainly doesn't mean that there will automatically
soon be a forced auction of his real estate.
The baNK has a logical interest in finding the client a
way out," says Pavel Hrubeš, the director of the credit
risk management department of Českomoravská hypoteční banka
(ČMHB). He says that the entire process can drag on for a
relatively long time, and if you miss one payment you will
definitely not lose your new apartment.
The simplest solution is to arrange different payment agreements
or restructuring measures, which can include an interruption
of interest, a change in the interest rate, a postponement
of payments, or financial assistance from other persons who
can become involved in the credit relationship. More complicated
measures include the selling off of the receivable, assignment
of the debt, accession to the debt, or auctions and bankruptcy
proceedings. ČMHB, which together with Česká spořitelna and
Komerční banka controls most of the mortgage market, has
taken 96 clients to auction during its existence. 23 cases
resulted in actual auctions, while six went through properly
conducted but unsuccessful auctions.
The first step is to try to determine why payments aren't
being made and to stipulate a corresponding solution," Hrubeš
explains. In the first phase reminders are sent to the client.
The collection call center employees start calling the client,
and they try to agree on remedial measures. But if no remedy
can be found after a few months, or if the client doesn't
want to communicate with the bank, the case goes to the credit
risk management department. This sets off marathon proceedings
that can drag on for several years - in the worst case resulting
in a forced auction.