Beware of the snowball effect
The statistics speak for themselves: within two years, the number of small loans to consumers in Germany has almost tripled. Last year, they took out 3,83 million loans under 1.000 euros, according to the credit agency Schufa; in 2020, the figure was 1,37 million. "Small loans are booming," states Schufa.
"Buy now, pay later" (BNPL) has become a particularly popular payment method. It is a new form of purchase on account. If there is not enough money in the account on the due date, the invoice can be divided into installments – at first, it seems like a harmless, interest-free purchase on account, which can suddenly become a debt trap with potentially horrendous interest rates.
"Klarna debt" can become a big problem
Not only consumer protection agencies but also the financial supervisory authority BaFin warn against the payment method. In this respect, it is logical that the EU legislators, who are more focused on consumer rights than in the past, are tightening up the rules. Especially, since the previous reform of the consumer credit directive dates back to 2008. It does not even cover many new forms of credit and excludes amounts below 200 euros.
For undisciplined consumers, BNPL can result in a snowball effect: Small bill amounts can add up to a big debt problem. The phenomenon even has a name: Klarna debt. Under this buzzword, at least for a while, mostly young people bragged about the amount of debt they had accumulated with the online payment provider from Sweden.
Without interest rate cap
The EU member states have a lot of leeway when it comes to implementation. This applies, for example, to new approaches to debt counseling. But it also pertains to the type and scope of information that flows into the expanded creditworthiness check. Banks and financial service providers like Klarna are all too happy to rely on the Schufa Score – no wonder that they are pleased with the expansion of the consumer credit directive.
In any case, it is essentially up to the German government whether and how the new legislation turns out. This also applies to dealing with "usurious interest rates," as consumer advocates repeatedly complain. The EU member states are tasked with introducing suitable measures to combat excessive borrowing costs.
The reformed directive does not include an obligation to introduce an interest rate cap. It is rumoured that the German government has spoken out against it in Brussels. Banks and savings banks should therefore have little to fear when it comes to the notorious overdraft interest rate.