Estonia stands firm on Fast Loans

  • 2013-07-24
  • By Marian Manni

EASY MONEY: A loan is only a short SMS away.

TALLINN - A new law which bans overly emotional advertisements offering easy money loans, forcing fast cash companies to do a better job of informing their customers to the risks, is not enough say debt counsellors.
Debt counselors Terje Laats and Ulle Schmidt, laugh at the idea that the new law will change anything: “It seems that the ads have only gotten bigger in the city!” Laats says. There’s one ad in front of their office. On a bus (“Money is not far!”), on TV (“It will only take 15 minutes!”), all over the Internet (“We are always there for you!”).

Jevgeni, aged 31, came to their office for the first time. He says that these advertisements are like hypnosis for him. “Why should I bother my friends and family if it’s that easy to take a loan from these companies?” he thought five years ago after losing his job when the crisis hit. Now he pauses for a moment: “Nobody told me how expensive it really was.” It was four more loans later when he realized that he was in trouble. Jevgeni says that nobody ever asked him if he had a job or enough money to pay back the loan and the growing interest. He doesn’t have a car nor a girlfriend anymore, but enough loans to keep his mind busy.

From the beginning of July the fast cash companies have to make sure that their customers have enough resources to pay back the money they borrowed. It doesn’t mean that they would refuse to give a loan. And their customers would have the right to contest a court decision if they weren’t informed about the risks and if the lenders didn’t check their background before lending the money.

There might be around 40 fast cash companies in Estonia. With some, a borrower could send a text in the middle of the night and receive the money. Nobody knows exactly how many smaller and bigger lenders there are. Just as nobody really knows how many people use their services. The weekly newspaper Eesti Ekspress wrote a few months ago that every sixth Estonian has taken a quick loan. Every fifth has troubles paying it back. Schmidt and Laats think there are probably even more people involved. Lindorff, one of the leading debt-related service providers, for example, estimated that every third Estonian has been in their registry over the years.

Economic analyst Maris Lauri says that such a high number of people in the lending trap shows the lack of knowledge on the subject. “People are overly optimistic and they lack knowledge in finance.” She says that there is nothing else to do except for raising the awareness among them.
“It’s this market economy we are all trying to do here, but we don’t really know to manage within it yet. Quick loans are taken everywhere, but in Estonia people are not ready for this. They don’t know enough about quick loans and the very poor can really fall into a trap,” says Lauri.

Estonia has always been for the free market policy. It’s very easy to start a business here (according to a survey by SEB Bank, it’s easier here than in the other Baltic States) and the government rarely gets involved. Even the chancellor of justice, Indrek Teder, said a couple of years ago that limiting interest rates would offend entrepreneurs’ basic rights.
Indrek Niklus, the Justice Ministry’s private law service head, was involved in the new law-making processes at the parliament. He said that there was a discussion about having government play a greater role in regulating the interest rates. In the end they decided to force lending companies to take more responsibility and inform their customers better. If this won’t work, they might consider becoming stricter.

In the end it all comes down to what it often does in Estonia: the free market. “We cannot forbid giving loans,” Niklus says. “What would be the consequences? All those people would have to pay their loans back right away, loans they might have taken to buy a car to go to work and improve their economic situation. However, it’s important that a customer considers his or her capabilities before taking a loan. Not everyone [is a] lawyer.” The new changes in the law were meant to help educate people.

The authorities in Finland didn’t go that easy on fast loan companies. Estonia’s northern neighbor has placed a ceiling on interest rates – 50 percent per year. Laats and Schmidt are convinced that the same should be done in Estonia. Especially since Finnish law has made the Estonian market ever more attractive. “Those who used to do the fast loan business in Finland have become very active here now,” says Schmidt.

Big Bank (their slogan is “It’s that easy!”) is one of the biggest non-universal banks in Estonia. Their CEO Kaido Saar says that the law won’t really make any difference to their business. “We already made changes some time ago.” Saar doesn’t like his company being compared to fast loan lenders. He says that their customers take bigger loans for longer periods of time. Schmidt and Laats both shake their heads when Big Bank is mentioned. “We hear that name a lot in this office.”

Saar says that their biggest number of customers come from Latvia, although the Lithuanian market is also catching up.
A mother of three didn’t have enough money to pay for her groceries at the supermarket. In fifteen minutes a loan landed in her account. To pay for the first loan, she took another one. And another one to pay for the second one. Now she has around ten loans to pay back. Again, Schmidt and Laats don’t raise their eyebrows. Another typical story. And a rising trend.

Not only are Estonians reaching for fast loans – often starting from only 50 euros – to buy more costly things that they couldn’t otherwise afford. The new trend, Laats says, is to simply fill the shopping cart – just to survive. She always asks those seeking help from her, why did they take the loan in the first place? Lately, three out of ten would say: “To buy food.” Many are women.

Some companies welcome the new legislation with open arms. Rain Sepp, a regional manager for the Baltics at Credit24, hopes that it will civilize the fast loan market. “It’s good! Then we’ll all have the same rules.” He then admits that the business used to be much more primitive. Being in the fast loan market was like cutting yourself a path through the jungle.

He also hopes that the new law will scare smaller businesses away. In his view, it’s not profitable for the fast cash companies to give loans to people who cannot pay them back. “One bad loan is very costly. We wouldn’t know if we really got it back, and how much of it. There’s a lot of energy and work with that,” he says. Therefore he welcomes the new legislation.

Come what may, Schmidt and Laats won’t have to worry about losing their jobs in Estonia any time soon, as the business keeps growing.