On September 1, 2018, an interest rate ceiling for sms loans, quick loans, and other high-cost credits will be introduced, which we have written about earlier. The interest rate ceiling will be 40% in addition to the reference rate. But what does this mean in practice?
The ceiling applies to the effective interest rate
The interest rate ceiling you are talking about applies to the effective interest rate, not just the nominal (annual interest rate). The annual interest rate together with all other fees must therefore not exceed 40% plus the reference rate.
The reason why the interest rate ceiling applies to the effective interest rate is quite obvious.
If it only applied to the annual interest rate, the credit companies would have been able to set an interest rate at the interest rate ceiling and then charged a lot of high fees. It had not become sustainable.
In addition, the loan cost must not exceed 100% of the amount borrowed. For example, if you borrow USD 10000, the total cost of the loan may not exceed USD 10000, even after reminder fees and collection fees.
How high is the loan rate really?
Of course, not all lenders will put their interest rate ceiling around 40%. Here at Good Finance, for example, you will find quite a few fast loans that have a lower interest rate than that (see below).
But what high-interest rates can those who want to put on the roof charge in practice? It depends on how high the reference rate is.
The reference rate is determined by Good Finance and corresponds to the repo rate at the end of the previous six months. If the repo rate has to be rounded, it is done upwards to almost half a percentage point. The repo rate at the end of 2017 was – 0.50%, so the reference rate is currently -0.50%.
If we had had an interest rate ceiling today, the effective interest rate would have been a maximum of 39.50%. Thus 40% minus the reference rate which is minus 0.50%.
But do not expect that this “low” ceiling will apply for any length of time. We have had a negative interest rate in Sweden for quite some time now and it is guaranteed to be raised in the relatively near future.
In 2008, for example, we had a reference rate of 4.5% in the first half of the year and the same in the second half of 2002. With such a reference rate, the interest rate ceiling is 44.5%.
It is not likely that it will be that much higher than that since during the last 15 years we have almost always had lower reference rates than that. This is what it looks like:
- Since July 7, 2016, the reference rate has remained at – 0.5% just like today. If we look at another three half-year periods, it was at 0% and the two years before it was at 1%.
- In other years, the reference rate has looked like this since 2002: during three half-year periods, it was 0.5%, for four periods 1.5%, for five periods 2%, for three periods 3%, for a period 3.5%, for two periods 4% and two periods 4.5%.
Extremely low-interest rates
Yes, so after these extremely low-interest rates, you can probably expect that the ceiling will usually be between 41.5 – 43%, but sometimes lower, sometimes higher. And the sms and fast loans that will be offered will certainly have maturities of at least half a year, but even more often at least 1 year and up.
A loan of, for example, USD 10000 with a maturity of 1 year which has a maximum interest rate of eg 41% (if the reference rate is 1%) would cost USD 1,890 for straight amortization or USD 1,989 for an annuity.
Other examples of borrowing costs at an interest rate ceiling can be seen in our article where we ask the question whether the fast loans will be cheaper or not.