Consumer protection is a system of national and societal measures to protect consumers. A consumer also means a person who takes out a loan. Borrowing is a common consumer behavior in society.
This allows the borrower to improve their quality of life on favorable loan terms, or helps cover unexpected expenses when savings are low. Estonian consumer protection also offers recommendations to borrowers, and in the following we present an overview of the most important aspects of consumer protection when borrowing.
What does the Consumer Protection and Technical Surveillance Authority deal with in connection with loans?
The Consumer Protection and Technical Surveillance Authority deals with problems related to loans in terms of pre-contractual information, standard consumer credit information sheet, right of withdrawal, early termination of the loan agreement, various recovery costs, etc.
What are the consumer’s rights when taking a loan?
According to the Consumer Protection Board, a consumer has the following rights when taking a loan:
- apply for a loan that meets the requirements for financial services;
- to obtain the necessary and truthful information on the terms of the loan offered in order to make an informed choice and timely information on the risks involved in repaying the loan;
- receive information about your rights;
- to receive advice and assistance if his or her rights have been violated;
- if damage has been caused through the fault of the lender in connection with taking the loan, to demand compensation for the proprietary and non-proprietary damage.
What are the consumer’s obligations when taking out a loan?
The lender has the obligation to assess the borrower’s solvency, inform him of the risks associated with the loan, etc., but the borrower also has obligations. The Borrower is obliged to:
- to realistically assess its actual and future solvency, taking into account all monthly income and expenses and existing loan liabilities;
- be open and honest in informing the lender of their financial situation;
- familiarize yourself carefully with the terms of the contract and, if something is not clear, ask the lender clarifying questions;
- inform the lender as soon as possible in the event of payment difficulties in order to find a rapid solution to the situation, either by extending the loan period, establishing a flexible payment schedule, taking a short payment holiday or refinancing the loan;
- if necessary, also consult a debt counselor.
The loan agreement is binding and applies equally to both parties. To make it easier to resolve potential problems, it is a good idea to keep all contract documents, including contract-related e-mails.
What are the requirements for financial services?
The Consumer Protection Act contains regulations that also extend to the provision of financial services. The credit service, like any other service, must meet the requirements for the service and have the characteristics that the consumer normally justifiably expects. In addition, the loan service must apply the principle of responsible lending and must not exceed the upper limit of the cost of credit. The loan agreement concluded with the consumer must comply with the numerous conditions set out in Section 2 of the Law of Obligations Act “Consumer Credit Agreement and Related Agreements”.
What exactly are the obligations of the lender?
The borrower must assess his solvency, inform the lender, etc. The lender also has at least as many liabilities. The main obligations of the lender are as follows.
- When offering a loan service, the lender must do everything in its power to avoid possible risks, including providing the borrower with information about interest and warning him or her with due diligence about possible negative consequences.
- The lender is required to co-operate with the Financial Supervision Authority, the Consumer Protection and Technical Surveillance Authority in order to avoid the dangers arising from the service provided. For example, the website of the Financial Supervision Authority has a register of both active and closed credit institutions, creditors and credit intermediaries, which it is reasonable to check before borrowing.
- Before concluding the loan agreement, the lender is obliged to provide the borrower with the European Consumer Credit Standard Information Sheet (see the sample). Banks and fast lenders, as well as installment, credit card and other loan providers, are obliged to provide the information sheet.
- The lender must follow the principle of responsible lending when offering the service.
- As important as adherence to the principle of responsible lending is that the interest rate on the loan granted by the lender to the consumer is in line with the credit cost ceiling.
More information on the requirements for financial services can be found on the website of the Consumer Protection and Technical Surveillance Authority and on the consumer website of the Financial Supervision Authority.
What is the principle of responsible lending?
The principle of responsible lending imposes two main obligations on the lender.
- Before concluding a loan agreement, the lender has an obligation to obtain information on the consumer’s creditworthiness. Information on the consumer’s creditworthiness is the financial situation of the loan applicant, regular income, other proprietary obligations, fulfillment of previous payment obligations and the effect of a possible increase in financial obligations arising from the consumer credit agreement.
- The lender has the obligation to assess the consumer’s creditworthiness, ie the ability to repay the loan. The lender must base the creditworthiness assessment on the information gathered and assess it with due diligence. The lender must carry out the necessary assessment operations, taking into account the terms of the consumer credit agreement, the available data on the consumer and the amount of the financial obligation to be assumed.
What is the upper limit of the credit cost rate?
The upper limit of the credit cost rate changes according to the statistics published by Eesti Pank. If the credit cost rate in the loan agreement is higher than permitted by law, ie if it exceeds the average credit cost rate of consumer loans by more than three times, the loan agreement is automatically void. Eesti Pank publishes the average credit cost rate on its website on 1 December and 1 June each year. You can read more about this topic in our post “Credit cost rate – what is it?”.
How does the Consumer Protection and Technical Surveillance Authority regulate borrowing?
The website of the Consumer Protection and Technical Surveillance Authority has several recommendations, the emphasis of which is based on the awareness of the borrower. All types of consumer credit, such as loans, leases, installments, credit cards, etc., are subject to the same legislation. Consumer protection is guided by the principles of responsible lending valid in Estonia and elsewhere in Europe when regulating borrowing. Before entering into a loan, installment, lease, or credit card, keep the following in mind.
- To enter into the contract with the best terms, consider the offers of different lenders and take an offer from a couple of different companies before making a decision.
- To get a good comparable overview of all important loan terms, ask for a consumer credit information sheet with the offer to compare the terms offered by different companies.
- In order to thoroughly read the loan agreement before signing it, ask the lender for a copy of the draft agreement in addition to the information sheet.
- If the conclusion of the contract also requires insurance (for example, in the case of car leasing and home loans), you can also conclude the insurance contract with the insurance company of your choice.
- You can also fulfill your obligations under the consumer credit agreement prematurely, in part or in full, without having to pay interest and other costs for the period of non-use of the credit.
How to choose a lender?
The following aspects should be considered when choosing the best lender.
- Offer . The loan agreement could, of course, be concluded with the lender who offers the loan on the best terms. The loan conditions are the interest rate, the cost of credit rate, the repayment period, the associated costs, the costs associated with late payments, the amount of compensation for early repayment of the loan, etc.
- Maine . In addition to the loan conditions, the reputation of the lender must also be taken into account. It could also be ensured that the credit company has a correct website with contact information and through which additional information can be requested if necessary.
- Friends’ recommendations . The experiences and recommendations of friends and acquaintances are also important in choosing a lender.
- Background check . Sometimes, however, the loan offer may seem great, but the lender is unknown or unreliable. Background checks on the lender help to mitigate this risk.
How to do a background check on a lender?
In the case of a smaller and lesser-known loan provider, good sources of information are the Commercial Register and the annual report, which can be analyzed and a background check can be performed. The blacklist of the Consumer Disputes Committee of the Consumer Protection and Technical Surveillance Authority is also helpful.
The Consumer Disputes Commission settles disputes between consumers and businesses. If the Consumer Disputes Commission makes a decision in favor of the consumer and the company does not perform the activities prescribed by the decision, which may be compensation for damage, performance of the contract, withdrawal from the contract, etc., within 30 days, the company is blacklisted. Lenders on this list should be avoided, as being on the lender’s list shows that problems may not be resolved amicably.
How to choose a loan?
When choosing a loan, it is important to find a loan with the most suitable conditions. All creditors are required to provide the applicant with a standard consumer credit information sheet, which makes loans offered by different companies comparable. The information sheet lists all the financial costs that the borrower has to pay in connection with the loan. The information sheet states:
- the amount of the loan;
- the annual interest rate of the loan;
- credit cost rate;
- in the case of a payment schedule, the amount of the monthly payment;
- possible interest (arising from untimely repayment of the loan);
- other fees added to the debt (for example, contract fee, contractual penalty, etc.);
- the total cost of the loan.
In addition, the level of notary fees and insurance costs should be monitored (for example, in the case of car leasing and home loans). It is also reasonable to consider whether a deposit and a guarantee are required to obtain a loan, and what the maximum loan term is.
How are loans taxed?
The VAT Act stipulates that tax-free turnover includes loan transactions, consumer credit, mortgage loans, leasing transactions and other business financing transactions. This means that the loan is not subject to VAT.
Is it possible to withdraw from the loan agreement and how?
The consumer credit agreement may be withdrawn without giving a reason within 14 days. In the case of a consumer credit agreement related to residential real estate, the loan agreement may be withdrawn within 7 days. Withdrawal from the agreement does not need to be justified to the lender.
If the seller wishes to withdraw from the consumer credit agreement and the economically related sales contract within 14 days due to the fact that the thing transferred under the contract is defective, the seller must be notified of the defect.
Neither the lender nor the seller can prevent the customer from exercising the right of withdrawal and the customer does not have to agree to the correction of the error, which may be the repair, replacement, etc. of the goods purchased for the loan.
What to do if there is a problem with the loan?
The most common problem with a loan is getting into payment difficulties and having trouble repaying the loan. In this case, the following must be done.
- Informing the lender . In the event of payment difficulties, the borrower must contact the bank or lender that issued the consumer credit as soon as possible and inform the company of its payment difficulties.
- Finding a solution . The purpose of the lender is to reach an agreement with the lender and a solution that is suitable for both parties, which may be an extension of the loan period, a flexible payment schedule, short-term payment leave or refinancing of the loan.
- Contact a debt counselor . If the amount owed is already “overgrown”, there are many loans and it is difficult to reach an agreement with the lenders or you simply cannot inform the lender, you should turn to a debt counselor. The debt counselor can suggest what to do to solve the problem and, if necessary, help to prepare documents for communication with the lender.
Who can help resolve loan disputes?
In the event of payment difficulties, it is best to contact the lender directly, but if there is a problem or dispute with the lender, the following national authorities may be able to help.
- Consumer Protection and Technical Surveillance Authority . The Consumer Protection and Technical Surveillance Authority deals with problems concerning pre-contractual information, the standard consumer credit information sheet, the right to withdraw from a loan agreement, early termination of the agreement, collection costs, etc. The Consumer Protection Board may be contacted for an information request or a complaint against a lender.
- Financial Supervision Authority . In case of problems related to consumer credit, everyone has the right to turn to the Financial Supervision Authority for independent advice and explanations. On the basis of the complaint, the Financial Supervision Authority may submit an inquiry to the lender in order to obtain additional explanations and verify whether the activities of the credit institution comply with the laws in force in the Republic of Estonia.
If the contacts with the lender have not worked, you can go to court to resolve the dispute.