17th Aug 2022

EU clinches deal on consumer-friendly loans

EU ministers have clinched a deal on more consumer-friendly rules for providing credit and personal loans following years of disputes over the issue, hoping to motivate European borrowers to shop around across borders for better interest rates and other contract conditions.

The competitiveness council - representing the member states - agreed on Monday (21 May) on a compromise put forward by the German EU presidency which streamlines regulations for loans of up to €100,000.

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Currently, the €800 billion-a-year EU consumer loans market is largely fragmented on a national basis, with differing rules on consumers' rights and protection across the 27 member states.

German minister Brigitte Zypries, who chaired Monday's debate, said the new legislation would bring "clear practical advantages" to Europe's borrowers, particularly in terms of boosting transparency so that they can "make genuine comparisons among credit offers."

"This directive will make it easier for the growing proportion of mobile citizens and users of internet banking services to identify opportunities beyond the borders of their national credit markets," she added.

Experts suggest the move will also boost competition which could result in lower interest rates and charges.

The deal means that the annual percentage rate of charge for credit will be calculated according to uniform standards so that consumers can compare different offers and make "an informed decision regarding the conclusion of a credit agreement."

As a solution to one of the key problematic issues ahead of the meeting, ministers agreed that consumers should not be obliged to compensate their bank for losses of interest on loans of up to €10,000 if they repay them early.

The refund will apply however to providers of fixed interest rate credits where the interest rate is lower at the time of the early repayment than at the time of conclusion of the loan contract.

As part of the reform - stuck in the EU pipelines for five years - consumers will have 14 days to withdraw from a contract on loan without having to give a reason.

The political package will now have to be formally approved by the council and then go for a second reading to the European Parliament.

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