In view of the booming demand for installment loans, consumer advocates are calling for better protection against over-indebtedness. Lenders should offer their customers flexible repayment conditions in financial emergencies, for example.
“Buy Now – Pay Later” – buy now, pay later: shopping on credit is popular, but consumers often overestimate their financial capabilities. The Federal Association of Consumer Organizations (vzbv) is therefore calling for people to be better protected from possible over-indebtedness during the credit approval process.
In order to protect consumers from over-indebtedness, the vzbv demands, among other things, that banks be obliged to check consumers’ income and regular expenses before the loan agreement is signed – even for mini-loans. “Especially with loans with a small amount or short term, a particularly high risk of over-indebtedness must be assumed, which is why the obligations from existing loan agreements in particular should be taken into account,” warns the vzbv.
Better compatibility with data protection
In addition, lenders should be obliged to offer consumers who experience repayment difficulties flexible terms before their contract is terminated, such as a reduction in instalments or a deferral of payment.
In order to take into account both over-indebtedness protection and data protection, the vzbv also proposes supplementing the obligation to carry out credit checks with a strict ban on processing sensitive consumer data. “The credit check must be designed in such a way that the individual income and regular expenses are checked for every type of consumer loan without processing sensitive consumer information,” says vzbv expert Mohn.
Seizing opportunities from new EU regulations
Anyone who wants to take out a loan in Germany usually has to undergo a credit check first. Part of this is often a credit report from a credit agency – such as Schufa. The check is intended to give banks and savings banks information about how high the risk is that a borrower will not repay a loan. Small and short-term loans of up to 200 euros are exempt from such a check – for now.
The EU Consumer Credit Directive, which came into force on October 30, 2023, also provides for an examination before granting such loans. In the future, anyone who borrows money from the bank should be given more understandable information about what it costs. The aim is to protect low-income households in particular from excessive debt. EU member states must implement the requirements into national law by November 20, 2025.
The Federal Association of Consumer Organisations and the Institute for Financial Services (iff) have drawn up proposals on how the Consumer Credit Directive could be implemented in Germany. The opportunity is to “improve the legal framework for the granting of consumer credit in the long term,” argues the vzbv.
Less over-indebtedness in Germany
The number of over-indebted private individuals in Germany has been declining for years: As data from the Debtor Atlas 2023 show, 5.65 million citizens over the age of 18 were over-indebted last year. This means that the number of over-indebted private individuals has fallen for the fifth time in a row and will fall to the lowest level in 2023 since the evaluations began in 2004.
“Loans can help consumers to realize projects such as buying a car or kitchen or to bridge financial bottlenecks. However, we observe that banks repeatedly grant loans that end in consumers being financially overwhelmed or over-indebted,” said Dorothea Mohn, team leader for financial markets at vzbv.
More installment loans
At the same time, however, the number of installment loans has also increased: According to data from the credit agency Schufa, the number of newly concluded installment loan contracts in Germany in 2022 rose by 30 percent compared to the previous year to a good 9.1 million contracts. Around 3.8 million of the new contracts were small loans of less than 1,000 euros. In almost 98 percent of cases, installment loans are repaid as per the contract. Nevertheless, Schufa board member Ole Schröder warned: “Even the repayment of many small loans can quickly lead to financial overload.”
Buy today, pay tomorrow – from the perspective of many consumers, this is an attractive offer, especially since financing is often advertised at no cost. “In particular, the emergence of new forms of credit such as buy-now-pay-later, which enable quick financing of goods in online retail, creates new risks for consumers to overestimate their own financial possibilities,” emphasizes the vzbv.