A year ago or less than that, there were as many lenders offering SMS loans or fast loans (basically the same thing). Today, there are not many people offering these loans in the usual form. What happened then? Well, simply put, new rules were introduced around so-called high-cost credits, which put a stalemate on many lenders.
The definition of a high-cost credit is a credit or loan with an effective interest rate that achieves the reference rate (based on the repo rate) plus 30 percent and in practice this means a nominal interest rate of at least 29.5 percent (since the repo rate is -0.5 percent just now). All loans that exceed this limit are called high-cost credits, and the lender must tell customers clearly.
The Consumer Credit Act introduced new rules that included both an interest rate ceiling and a cost ceiling. The interest rate ceiling means that you can never charge a higher interest rate on loans or credit than the reference rate plus 40 percent. Which is thus 39.5 percent at the time of writing thanks to the prevailing minus interest rate.
The cost ceiling, in turn, means that you never have to pay more in interest and fees than the loan amount is. Thus, if one were to borrow USD 5,000, the total cost of that loan or credit should never exceed USD 5,000. This includes interest, fees (planning fee and management fee), late interest and collection costs.
A high-cost credit must always be associated with a credit check on the applicant. It was recommended earlier, of course, but not a must for loans with short maturities and smaller fees. The lenders (who offered, for example, SMS loans and quick loans) could choose for themselves and perhaps occasionally pass through people who should not have been approved.
Another thing that was decided in the law was that you can only extend a loan of this type once. The only times you can avoid this are if the extension is free of charge to the consumer or if you have created a sensible repayment plan that aims to give the borrower a good chance of paying off his loan.
Finally, the rules for marketing became a little stricter as you first and foremost have to say that what you offer is a high cost credit and in addition you also have to inform about the risks of borrowing and how to contact someone to get help with their debts and questions. On top of this, marketing must also be “moderate”, factual and balanced and not intrusive.
Exactly what this means can be thought of, but it does of course impose some limitations in advertising, for example, where many lenders who offered SMS loans previously used to resort to rather poor advertising which encouraged borrowing for the wrong reasons.
The new rules in the Consumer Credit Act seem to have hit hard on lenders offering traditional SMS loans and fast loans. These loans are usually of the kind that offer from around USD 1,000 to 10,000 (sometimes USD 20,000) with a short repayment period, such as 30, 60 or 90 days.
This type of loan has long been called too expensive and it is quite clear that it is not so cheap to take an SMS loan. This is something that we would normally recommend to avoid, unless it is a very short-term and urgent need that you know you will be able to pay back within a few months. And where you are perfectly ok with paying the fairly high cost such a loan entails.
Now, lenders are being forced to set a 39.5 percent interest rate limit, which was not so easy for them. Since an SMS loan / fast loan lends it ex 30 days, the interest rate will normally be clearly higher than if compared with a regular private loan. Most of the annual interest rates of 39.5 per cent were simply not successful. The profit was too poor in relation to the risk and the short maturities.
Also, some lenders who offered small private loans, ie with one or a couple of years maturity but with loan amounts of up to 30,000 or maybe a maximum of USD 50,000 had problems with this. They had had rather high interest rates and expensive loans but were now limited by the rules of the law.
What happened was that many lenders either terminated their business or changed their orientation. As a result, many of those who previously had classic SMS loans and fast loans, and also some of the most expensive lenders in small private loans, disappeared.
What happened to those who did about their business? Well, many of them started investing in something new instead. They started with account loans instead of regular loans. Sometimes it is called online credit because you can obtain the credit online and that it exists and is managed online.
Account credits are not a new phenomenon. It has been around for a long time and is very smooth at times. It actually works in much the same way as a credit card, that you are granted a credit for a certain amount such as USD 20,000 and that you can then use all the money or part of it, as needed. Just take the money from an account instead of paying with a card. You then only pay for the part you use and the time you use them.
This is something that is very smooth when renovating, for example, because you do not always know exactly how much money it will take or when you need the money. If you can get an account credit with the bank for your renovation loan, you can withdraw USD 10,000 here and USD 20,000 there when it is time to buy things or pay invoices. It is better than borrowing, for example, USD 200,000 straight off because you then have to pay interest on the loan from day one and on the whole amount. You may not need to spend a large sum until the end of the renovation and then you can safely save money by only utilizing the credit for a short time.
However, many lenders saddled so that they could offer slightly smaller account credits or what were also called online credits, for example up to around USD 30,000. These are still relatively expensive and usually have an interest rate that is close to the maximum limit of 39.5 percent.
The difference between a credit and a loan is that you apply for credit for a certain amount and you can then borrow as much as you need within this framework. For example, you can borrow more when you want, up to the credit limit and as long as you have repaid the money you can borrow them again without having to apply again. So there are smooth aspects with a credit.
I like the idea of an account credit in some cases and they fit well in some situations, as I said for a renovation. Or as a kind of extra buffer for those situations when you really need to get extra money quickly. Then it is nice to already have an approved credit that you can use as needed. It should also not cost anything as long as you do not spend the money.
The sad thing is that the old lenders in SMS loans have many transferred to account credits and therefore often become quite expensive credits. It is not the most affordable loan you can take, although it is in many ways more flexible than a regular loan. On the whole, one can almost say that SMS loans remain alive only because it has a partly different form.
The disadvantage for the borrower with a credit is that they are actually attracted to using the credit clearly easier than for a loan. Since you have the money just a few clicks away and are already approved, it may feel like you are only transferring the money from another account. It also takes just five to fifteen minutes to receive the payout.
For a regular SMS loan you first have to apply and then get approved and finally get the money sent out. It usually took a day or possibly a couple. It was a little more difficult and you had more time to think about what is important in life and whether it is good to borrow. That way, it won’t be as easy to fix money for impulse purchases.