Issues relating to housing and consumer loans, and their resolution, have once again sharply come to the forefront.

In the case of home loans, the talk is more about simplifying the rules, such as reducing bureaucracy and associated costs when transferring a loan from one bank to another.

This was talked over in analysis of the banking competition situation conducted by the Bank of Estonia (Eesti Pank), and these thoughts were recently supported by Aivar Hundimägi in a daily commentary on Vikerraadio.

Consumer loans however carry with them significantly greater concerns.

Despite the economic crisis, the Bank of Estonia has highlighted the increase in the number of unsecured consumer loans and credit card loans being issued.

The rapid growth of such loans has increased the risk of more people facing difficulties with their repayments, economist Raol Kallas has written.

As if to underscore the central bank’s analysis, debt counselors told ERR news how frivolously large consumer loans, are given to young people and which are not in line with their wages. Unfortunately, it is also quite a common phenomenon that payday loans are approved for unemployed people too.

Real-life examples, as well as the various analyses, directly highlight the need to regulate the payday loan market, so that debtors are better protected. The creditor will certainly not allow themselves to be transgressed.

For years, great hopes have been associated with the so-called positive credit register, which would provide an overview of each of our obligations and hopefully help to prevent irresponsible lending.

The Ministry of Finance has pledged to submit the draft bill for the creation of this planned register to the Riigikogu this year, to deal with technical solutions for another year, after the necessary amendments are legislated.

This means this long-awaited tool is not expected earlier than 2026. Real-life stories and the deepening of the problem indicate the need to expedite the credit register’s activation, however.

Another long-awaited initiative being processed at the Riigikogu is the bill on credit intermediaries and buyers.

The Riigikogu’s Legal Affairs Committee is currently preparing that for its first reading at the main chamber; expected to take place in the second week of April. The plan is to subject debt collection agencies to the supervision of the Financial Supervision Authority (Finantsinspektsioon), and to set sanctions for them, and establish “reliability requirements” for these firms’ managers and owners.

The new law would require collection agencies to apply for an operating license and have a minimum capital of €25,000. A whole series of requirements applies to collection agencies when they use third parties for debt collection. Regulating collection services is undoubtedly a very important step in protecting those loan recipients who have fallen into difficulty in fulfilling their repayment obligations.

Has enough been done to prevent a person from reaching the point where they get dealt with by a collection agency? Increasing Estonians’ incomes and ensuring better loan capabilities is one aspect, and politicians need to think about this daily. Certainly, not enough has been done to prevent people from over-borrowing, from granting “quick” money to those who cannot afford to repay, and ensuring that the costs associated with a loan do not exceed the loan amount.

I argue that people need greater legal protection right at the loan issuance stage as later on, when they have fallen into a debt spiral, it is much more difficult to provide effective help.

It’s worth considering a proposal to establish a separate limit for consumer loans, similar to those on housing loans, which would be based on the ratio of loan payments to income. This would be particularly necessary for payday loans.

There has been a long discussion about setting an absolute cap on the interest rates for consumer credit agreements. The current law allows setting the interest rate at the European Central Bank’s (ECB) interest rate +8 percent, but higher interest rates can also be set.

The media has reported painful stories about exorbitant interest rates on late payments, showing that a solution must be reached in this area as well.

Additionally, a later start date for late payment interest in consumer credit could be stipulated.

Separately, the issue of banning payday loan advertisements is discussed. In my opinion, the first step should be to define the legal definition of a payday loan, as it is currently simply a loan product characterized by the absence of collateral, a small loan amount, and a short repayment period.

And if it’s not possible to incorporate the definition of a payday loan into laws, perhaps the advertisement of credit products that do not require collateral or where the loan amount is less than €2,000 could be banned. In any case, something needs to be done. Currently, promising money directly in hand is only prohibited with television and radio advertising, which raises concerns about online and direct mail advertisements.

The long-talked about idea of making consumer dispute commission decisions binding (binding decisions constitute, for example, those of the labor dispute commission, the Tööinspekstsioon) has so far been stalled by the Ministry of Justice opposition. Such a change would be especially welcome for consumer loans.

The cost of credit limit has greatly helped loan recipients and regulated the market. However, the nullification of a credit agreement could also be determined in other cases, for example, when loan capability has been inadequately assessed, or a false impression of the cost of the loan has been created.

Additionally, a mandatory out-of-court restructuring proposal for a loan recipient should be altered when a client faces difficulties with repayments. This could include extending deadlines, giving payment holidays, summarizing the claims of several contracts, as well as changing the rates of interest and penalties. The draft bill currently describes this as an option, and not an obligation.

These are just some thoughts and ideas that, in my opinion, deserve to be implemented. I hear about sad cases of payday loan victims an an almost daily basis. For this reason, I feel obligated to do something more for them and their families than just implementing a debt register and strengthening supervision over the collection agencies.

In a challenging economic situation, many fellow citizens look for the easiest ways to borrow money, but unfortunately, loans like this often prove to be too burdensome later, and only serve to deepen their difficulties. Borrowing money should not be as easy as it currently is.

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