10 Oct Credit Around The Globe
Credit Around The Globe
It’s not something we generally want to discuss: most of us are taught since we’re children not to make debt.
Nevertheless, most people do make debts at some point in their lives and – if managed right – this shouldn’t be entirely taboo. Whether you want to open a new business, want to buy a car, get a property or simply need a credit card to use while travelling – it’s good to have an understanding of credit and the divergent rules and stats around the globe.
Debt in a nutshell
We assume that our readers understand the basics of debt and will not delve into major definitions here, but let’s take a look at some other general concepts.
Individuals or institutions who extend credit to others have to assess the risk of extending such credit based on various criteria. Risk assessment criteria generally include the applicant’s:
– income value (salary, wage or dividends)
– type of employment (permanent, contract, freelance, part-time, self-employed)
– frequency of income
– length of employment and/or income stream
– other debts (overall value)
– payment behaviour
– level of education
– familial makeup
Some of these criteria are reflected in credit reports or scores, while others are based on broad statistical data – such as demographic information. For instance, past data may indicate that a certain age group or race are less likely to honour their debt repayments, which will increase the risk profile.
Many countries restrict risk profiling based on demographic data as it could be deemed discriminatory. The Catch-22 is that those who are most in need of credit present the highest risk to lenders. Even if they do get credit, this is often limited, offered at a shorter repayment term and at a higher interest rate.
While some lenders offer automatic credit increases if an account is managed responsibly, this is not legal everywhere. South Africa has, for instance, imposed regulations in the past few years which restrict automatic increases – lenders are to conduct a new affordability assessment each time credit is increased. Our legislation also stipulates certain criteria to be included in risk assessments to determine affordability. While lenders can certainly include their own criteria, they cannot omit any of the criteria stipulated in our legislation.
To a certain extent, lenders can harness the one thing which is kicking all consumers in their nethers – inflation. While inflation generally means less borrowers can afford to buy things, inflation also drives up the nominal values of assets, and immovable assets in particular.
The problem for new generations is that rising inflation and rapid market fluctuations are impacting them the greatest. While they are generally the lowest earners across generations in the western world in particular, their overall debt costs and risk profiles are seeing them pay more for the same relative assets. In the USA Generation Z (18 – 24) have seen an average mortgage balance increase year-on-year from 2020 to 2021 of 13,4% compared to Baby boomers with an increase of 2% for the same period.
In South Africa Gen Z is not affected as much by credit since our regulations generally preclude them from credit in the first place, but other countries offer credit to youths irrespective of their age. Some banks in the USA have no minimum age limit for credit cards while the minimum limit for the Bank of America is 16.
Of course, high school dropouts in places like the USA are far more likely to find work than SA and can easily acquire accreditation through a GED (which we’ll cover in a subsequent blog).
Debt in other regions
Now let’s take a look at some rules, trends and anomalies in credit regulation and provision from other world regions. We could, of course, not cover everything in depth. In depth reviews per region and jurisdiction will be done at a later stage.
The nation has preferred cash transacting until recent years, and is slowly making a transition towards a more cashless society. The country’s credit is regulated by various different factions and parts of legislation, so it’s important to know which Act and which governance is involved when credit is acquired.
Most consumers access credit facilities either via credit cards or mortgages. Mortgages can be extended to all consumers (including revolving mortgages), and can be taken out against immovable and movable property or securities – though there is divergent legislation applicable to each type of mortgage.
What we would deem ‘personal loans’ locally are usually granted via one of two credit card streams. The first credit card stream is the one most countries use where credit cards are used for shopping and general transacting purposes. The second credit card stream offers ‘cashing’ whereby the card holder can encash the funds in the card for general purposes.
The two card streams aren’t governed by the same legislation and require divergent licensing.
While most credit requires standardised screening, this does not apply to credit cards up to ¥100,000 used for general shopping and transacting purposes.
All credit which exceeds ¥100,000 and/or falls outside the scope of this credit card stream requires standardised screening. Additionally, the cashing credit card stream and all other forms of credit are subject to a ⅓ Total Volume Control restriction. This restriction prohibits lenders from extending credit which exceeds one third of the applicant’s annual income.
Japan also requires that merchants accepting credit cards register their services in an effort to remove low quality merchants from the credit market and ensure that merchants manage customers’ credit card information responsibly.
Lastly, the interest on credit is capped between 15% and 20% per annum depending on the amount of credit extended. Noteworthy while this is deemed ‘interest’, these caps are for the total amounts repayable by the borrower, including commissions and other fees.
As with many other Islamic nations, certain lenders aren’t allowed to charge interest on credit facilities or loans for Islamic banking services. Islamic banking restrictions have been relaxed in the past few years however, following a Supreme Court ruling in 2011 which stipulated that interest charges are deemed in line with Sharia law. Interest is generally still far lower than most countries, even if it is charged – whether by Islamic or conventional banking (major credit cards levy between 0,4 and 3,4% interest). Access to credit cards can often be acquired via an annual or lifetime membership fee with some carrying no interest for a higher membership fee.
The Central Bank of the UAE stipulates that personal loans can be secured against the borrower’s salary, end of service gratuity, or any other regular income from a defined source.
Personal loans may not exceed the borrower’s total income by 20x, may not exceed 48 months and monthly repayments and may not charge more than half of their monthly income.
At retirement age, lenders must restructure repayments to limit these to 30% of the borrower’s income or pension.
Car financing is secured against a mortgage of the vehicle and may not exceed 80% of its value. Repayments are capped at 60 months and may not be more than half of the borrower’s monthly income.
Loans are often offered on a syndicate basis, with multiple lenders providing parts of the overall credit extended.
The USA’s financial regulation is far different to what we have locally, and their credit market is not something we can cover here. We’ll simply go over a few points.
Unlike South Africa, the USA has a multitude of different financial institutions and many collateral and unsecured loan products available. Furthermore, the USA has a rather high interest rate cap of 36% which has remained unchanged for more than 100 years.
Mortgages, car loans and federal credit union loans are subject to a cap of 18% interest with the exception of payday loans which are capped at 28%.
Short-term and ‘small dollar’ lenders can charge in excess of 400% interest since the caps above don’t apply to them. It’s therefore imperative that borrowers check whether their state has limits on these types of loans.
Many consumers also access ‘pawn loans’ where a loan is offered against physical collateral which may be sold if the borrower doesn’t meet their repayments.
Mortgages are one of the most popular forms of credit in the USA. As with mortgages elsewhere, borrowers are extended credit to purchase immovable assets (for the most part), with the property itself serving as security for loan repayments. Mortgages in the USA can be secured via a bank or through a broker and the repayment terms will be determined by the individual lender while the repayment itself is facilitated by a mortgage agent . In addition to interest, lenders often charge a ‘mortgage guarantee fee’ in addition to title insurance.
Mortgage repayments can be fixed rate (with a fixed interest) for up to 30 years, interest-only (with the capital payable at the end of the term), repayment (with interest and capital paid back over time), variable rate (ARMs) or fixed-interest period ARMs.
In contrast to South Africa where one generally enters into a home loan agreement with one financial entity for the entirety of your loan OR transfer this loan willingly to another institution, mortgage banks or brokers in the USA can sell your mortgage to investors without your say-so. Lenders generally don’t have long-term income streams akin to the term of the mortgages they extend, in order to sustain a regular income stream, these lenders sell the mortgages to investors which allows them to sell more mortgages and lower their interest rates. Regulation merely requires that the lender inform you that your loan is being sold 15 days before the official transfer.
Luckily such mortgage resales generally don’t affect terms and interest rates though it can affect escrow calculation.
In the case of the housing market collapse in the USA, lenders offered subprime mortgages at adjustable rates which had low interest rates for a short period which spiked dramatically after a while. Many homeowners were subsequently left paying far more than the value of their properties and lost their homes as a result.
Secondary mortgages (junior-liens) are additional loans taken on the value of the home while the first is still being repaid. These often offer ‘revolving facilities’ which mean that the individual can continue taking out the entire available credit on their loans for the entire term.
This is one of the factors which saw the US mortgage balance increase by 5,9% in the past decade. Year-on-year total mortgage debt from September 2022 to 2021 increased by 7.6%, accounting for two-thirds of overall US consumer debt. For the same period credit card debt reduced by 1,8%. The rising mortgage rates have placed mortgage lenders in a conundrum as they cannot afford more mortgages without raising their prices.
The USA also offers Equity release which allows those of retirement age (55+) to borrow money against their property with no repayments until such time as they no longer want the property. Once the owner no longer wants the property, the funds raised by releasing the equity goes towards an equity release scheme and is used to provide income and healthcare for the owner.
The majority of Brazilian debt comes in the form of credit cards – with 29% of consumer debt.
Unlike other countries, banks in Brazil can extend credit cards to consumers even when they haven’t asked for them – when opening other accounts.
Revolving credit is subject to a 237,9% interest rate per year, so while cards are easy to come by, they come at a hefty cost.
Brazilian banks offer different kinds of loans which differ vastly from South Africa. There is the option to take out a loan without a credit check, but such a loan generally carries a high interest rate given the risk to the lender.
Payroll loans which used to be common in SA (but are no longer available) can be offered to consumers at interest of 2,14% – 3,06% which are taken from the employee’s salary before their salary is paid out.
Pledge loans work much the same as mortgage or asset loans elsewhere. In this instance individuals pledge certain assets or securities to the lender as surety for paying their debt. Individuals are known to pledge anything from life insurance, property, furniture, clothing, salaries and amounts deposited into savings.
In April 2011 the UK reset the minimum repayment on all new credit cards and introduced regulations which stipulate that the minimum repayment must also cover 1% of the total outstanding balance as well as interest, fees and charges. The exception is for cash withdrawals on credit cards as well as using cards in certain offshore areas.
From 1 December 2022 to 31 August 2023 the interest rate on post-2021 loans are capped at 7,3% (with a 6,3% cap from 1 September to 30 November 2022) the same applies for Postgraduate Master’s and Doctoral loans.
The maximum interest for mortgage loans are 9%, effective from 1 September 2022 to 31 August 2022.
The mortgage guarantee scheme guarantees to lenders where credit-worthy households can afford only 5% of the deposit and is currently offered until 31 December 2022. While the scheme guarantees compensation fto lenders in the case of losses, it does not safeguard borrowers from defaulting on repayments.
Of course, purchasing property in the UK is a bit of a Catch-22. Buyers can purchase property as freehold or leasehold estates. The difference between the two is that the latter is only applicable for a certain term. Both freehold and leasehold purchases are subject to ‘fee simple’, a legal term which means the Crown may purchase the freehold and this purchase may not be refused. In the event of the property owner dying without an heir, the land automatically defaults back to the Crown’s ownership. As with South Africa, land expropriation is entrenched in UK law – and it has been exercised numerous times. Most notably, 11 million acres of British land was seized by the crown with minimal and even no compensation.
70% of British citizens now own some form of land, but it should be noted that this accounts for only 5% of all British property. The Crown’s personal properties account for 11% of British property while the remaining 84% is owned by 189000 elite families and organisations who are not obliged to disclose any information about their ownership to the public. Problematic is that the top recipients of agricultural subsidies from taxpayers are these private property owners.
50% of England’s property alone is owned by 25 000 members of the aristocracy – less than 1% of its overall population.
While different countries in the EU have their own regulations and processes around lending and borrowing, all countries in the EU are required to adhere to the Eurosystem and the EU’s Consumer Credit Directives and regulations instituted by the European Parliament and Council.
Credit providers are required to provide the applicant with a Standard European Consumer Credit Information form.
Consumers should therefore compare the stipulations of their credit agreements against the legislation of the EU, as this overarching legislation is the decisive factor.
This is not always easy given the sheer volume of regulations and institutions involved in the EU. Oftentimes lenders argue that they were not made aware of regulatory updates OR that these changes were imposed after they’d already implemented previous measures.
The regulation of EU consumer credit is not always due to unscrupulous lending or over-indebting consumers, but mostly around admin and contractual stipulations. An example is a recent ruling by the Court of Justice of the European Union (CJEU) which found Germany in breach of the CCD as it found that the country doesn’t uphold the consumer’s right to cancel credit contracts.
Euro-denominated loans for consumption was 5,92% as of August 2022; this is the floating rate or initial rate fixation of up to one year to euro area households (percentages per annum, rates on new business). Rates specific regions at the same time were:
– Italy: 3,77%
– Latvia: 18,99%
– France: 4,66%
– Greece: 10,34%
– Germany: 7,17%
– Netherlands: 4,60%
– Finland: 7,09%
– Lithuania: 7,43%
– Cyprus: 5,92%
– Malta: 31,23%
– Slovakia: 11,93%
– Belgium: 4,36%
– Estonia: 16,95%
– Ireland: 8,92%
– Austria: 3,14%
– Portugal: 12,24%
– Luxembourg: 9,16%
– Slovenia: 5,90%
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