Credit culture comes of age

Olga Pazderová & Jaroslav Veselý
Photo: Petr Poliak

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.

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.

   Tomáš Halla
Photo by: Jan Vágner


   Marie Hešnaurová
Photo by: Jan Vágner


   Petr Víšek
Photo by: Petr Poliak


   Jiří Doubravský
Photo by: Jan Vágner


   Jan Vraný
Photo by: Petr Poliak


Banks guarantee lower interest
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 says.

Magical plastic
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 says.
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 out.

Housing loans multiplying like rabbits
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 estimates.
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.

We 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 his apartment.

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 goods COD.

Kristýna Havligerová

RPSN saves thousands

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.

Kristýna Havligerová

Car leasing – taking precautionsHaving 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 leasing contracts.

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.

Jiří Hrstka

Credit card: 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

   Pavel Hrubeš
Photo 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.

Martin Zika






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