While consumer loans may be readily available, how do you get them cheap? Mel Gerard Carvill, Non-Executive Director and Member of the Board, Home Credit NV, talks to Business Today in detail about what to consider when applying for a loan.
BT: How to obtain a loan at the cheapest rate?
Email: The first thing to say that unfortunately the poor end up paying a higher interest rate, how can they get a lower interest rate? Well, there are a number of big systemic things. And then there are a number of things people can do individually.
So in terms of systemic elements, the first and probably the most important is to have a very good credit reporting infrastructure. And by that, I mean that everyone who lends people money submits data to the bureau. If you have a really good credit bureau infrastructure, that means when people come in to lend, you have a really good set of data to work from. Because you know exactly what the risk is, if you don’t know the risk, you end up saying well, you have to assume the worst, and put a higher price.
The second systemic thing is that you get cheap financing for loan companies. Many loans are made by banks and non-banks, banks use deposits. But for other non-banks, they have to obtain financing on the wholesale market which can reach 12 to 13%. If you could reduce that, they could lend the money at a cheaper rate.
BT: How do you compare loans from really different providers?
Email: So if you have a very good law that says you have to use in all advertising one type of interest rate, the APR, then you can make that comparison. But if that’s not the case, it’s quite difficult, because someone could say that an interest rate is 12%. Someone else says 10%. While in reality the 10% is more expensive, because they calculated in a strange or not very honest way. So, as a consumer, you have to be very careful when determining what the interest rate is. And are there any other payments? Do you have to pay extra?
There is another protection, which is quite important. We have it in our products, because it’s a European requirement, there’s something called a cooling-off period. But it gives you a certain number of days to change your mind.
BT: Is the rise in interest rates a concern?
Email: After COVID, we had inflation anyway, it was accelerated by the war in Ukraine, as energy prices exploded and food prices increased. And the end result is that central banks raise interest rates in an attempt to curb inflation. And that means the cost of borrowing for core industry is going up. And so for businesses like ours, we might get a bit more revenue. But we could also have more non-performing loans. We have to be careful because higher interest rates can make it harder for people to repay. And also, the other thing that has to do with high interest rates, of course, is the risk of recession. If you have a recession, people are laid off and they can’t repay their loans.
BT: How is India doing in terms of regulation?
Email: Regulation has two purposes, there is the kind of prudential regulation to ensure that companies do not go bankrupt. But in this case, the most important regulation is market regulation, make sure people are fully informed. Do they have all the information they need to make the right decision? Is there a law that requires companies to disclose all information? Is there a law requiring businesses to assess affordability? And so, in other words, are these companies regulated to ensure that consumers are treated fairly.
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