The volume of ‘revolving’ loans recovers its pre-pandemic level, with average interest exceeding 18%
The savings accumulated during the pandemic are not being enough for Spanish families to face the rise in prices derived from the energy crisis. With inflation skyrocketing to 10.8% in July, households with lower savings rates have opted in recent months to increase their indebtedness as a formula to face higher expenses, with a notable increase in consumer credit in which products such as mini-credits , easy loans or ‘revolving’ cards are gaining prominence again. The upward evolution of the latter is especially surprising, after years of much litigation that significantly reduced their presence in the banking window.
Data from the Bank of Spain reflect how the amount of new ‘revolving’ credit operations reached 11,419 million euros in June. A figure that represents 13.5% more compared to the 10,000 million of December 2021. The data also exceeds all the volumes that were registered month by month last year. And also the 11,395 million that this type of loan represented in February 2020, just before the outbreak of the pandemic and the key ruling of the Supreme Court that described as usurious the interest rates applied by these cards that were “notably higher than the interest normal money.
The ‘revolving’ are a type of card in which the user has a certain credit limit, which can be returned in installments, through periodic installments. According to reports from the Bank of Spain’s Banking Client Portal, these fees can be established either as a percentage of the existing debt, or as a fixed fee. Periodic payments that the client can choose and change within minimums established by the entity.
Its peculiarity lies in the fact that the debt derived from the credit is ‘renewed’ monthly. That is to say, it decreases with the installments made through the payment of installments, but it increases through the use of the card (payments, ATM withdrawals, etc.), as well as with the interest, commissions and other expenses generated that are jointly financed.
The weight of the energy bill forces households to use savings and personal loans to pay for their vacations
This feature has its consequences. On the one hand, if a low monthly installment is paid in relation to the amount of the debt, the amortization of the principal will be carried out over a very long period of time, which can lead to having to pay a lot of interest that is fattening like a real ball of snow in time.
The problem is that these interests that are applied are, at the base, much higher than those of the usual personal loans, and can generate final debts that are impossible for consumers to pay. In February 2020, before the first Supreme Court ruling, the average interest rate that entities applied to ‘revolving’ was 19.8% and, after the ruling, it fell almost one point to 18.9 %.
At the end of June, the latest data available, the rates applied were around 18.15% on average, according to the Bank of Spain. And in some cases even exceed 20%.
Get into debt on vacation
If all consumer loans are taken into account, the outstanding balance at the end of June stood at 187,950 million euros. The figure represents 5% more than at the beginning of the year and this percentage increase is based on this growth in personal loans and ‘revolving’ due to the need to finance, for example, summer vacations.
The problem is that this situation occurs at a time when, according to the supervisor’s latest Financial Stability Report, the criteria for granting loans and the conditions applied were tightened in the second quarter of the year “generally”, with the forecast that this trend will continue in the coming months.
It is the whiting that bites its tail. The Bank of Spain warns that lower-income households have already begun to draw on their savings to meet basic expenses, given the need to allocate most of their budget to energy bills.
And it also warns that the proportion of indebted families with lower incomes is higher than the group of those with higher incomes, “so the ability to repay their debts would be comparatively more affected by an increase in energy prices.” ».
In other words, in the financial sector there is already a certain fear of a rebound in delinquency in this group. A situation that banks cannot afford after having managed to keep their default levels at bay during the last two years of the pandemic. Faced with the worst omens that pointed to default peaks of over 10% at the beginning of the health crisis, the figure fell to 4.18% in May, its lowest level since January 2009.
The challenge is that a possible increase in delinquencies related to consumer credit does not spoil the trend. That of the banks and that of the most indebted customers themselves.
In this scenario, the Confederation of Consumers and Users (CECU) warns of the need to take measures to protect the “most vulnerable” consumers against high inflation and against this tightening of access to credit that could lead this group to seek “alternatives in much more serious conditions such as ‘revolving’ and fast credits”.
The market is reactivated despite the judicial gibberish
The ‘revolving’ cards have been one of the great legal headaches for Spanish banks in recent years. After the recent rulings of the Supreme Court, the entities changed their strategy to seek agreements with clients and avoid new litigation, while drastically cutting their offer in this type of credit. But many claims for possible usury or lack of transparency in the signed contracts are still open in the courts. “Since the Supreme Court did not define the exact threshold to consider a specific interest rate as usury, the demands continue to proliferate and each sentence is different,” explain sources at the Hogan Lovells law firm.
It’s true. Since 2015, the High Court has issued three key rulings to determine what interest can be considered abusive. But none set an exact figure. Moreover, in its most recent ruling, on May 4, it determined that an APR of 24.6% charged in 2006 was not a user, as there were other entities that charged similar rates at that time. The same magistrates declared in 2020 that 26.8% were abusive in another court case. And in the 2015 ruling, the criterion was to consider usury an interest of between 14% and 18% (double the average interest on consumer credit, which was then between 7% and 9%).
At that time, the entities resorted because the consumer credit included other cheaper ones such as personal ones. So since 2011 the Bank of Spain established a new statistic for ‘credit cards and revolving’, which is the one used by the Supreme Court in its 2020 ruling. However, there is still a gap for contracts prior to 2010. In addition, the banks criticize that this new statistic is calculated under the type called TEDR, which does not include commissions and, therefore, results in lower costs than if the calculation were made with the APR, which is the data that, in their opinion, should prevail to define if the interest of a ‘revolving’ is usurious.