Ethics and quick loans

by Jose Donaldson

There is a great debate about the ethics of so-called microloans, mini-loans, or quick loans. The debate is centered on the fact that, being loans with a short repayment term (and even very short, only a few days), the Annual Equivalent Rate (APR) is very high, that is, proportionally the cost of hiring one of the These loans is much higher than applying for a long-term loan.

To begin we must define what is the APR. According to the Bank of Spain, the APR reveals the cost or effective yield of a financial product. The APR includes both the interest charged by the lender, as well as expenses, commissions and other expenses that may be applied to the loan, so that we can actually compare the conditions offered by each entity. Since the APR refers to the annual cost, using this parameter we can quickly and efficiently compare if a loan is more expensive or cheaper than another, simply comparing your APR.

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What happens then in the very short term credits? If for example we ask for a loan of 200 Euros, to return it in 30 days, the cost to be paid to a lender is € 65 (Cashper), € 66 (MoneyMan) and € 74 (Loan10). The minimum and maximum APR of these examples ranges from 2,968.7% for the cheapest and 4,507% for the most expensive. That is, much higher than the percentages usually used for mortgage loans, and even for longer term personal loans .

And here the debate arises: are they excessive expenses? Are they “usurious” interests? The lenders justify it by arguing that they have to compensate for a high risk (due to the absence or simplification of procedures that allows speed and agility when granting the loan, but also a much higher rates of delinquency). Consumers argue that the APR of this type of loans is disproportionate compared to the usual prices of loans. Even Google has entered the debate, prohibiting advertising in its search engine (Adwords) to those who advertise loans for a period equal to or less than 60 days, or that do not meet certain obligations of clarity and information to the applicants of the loans.

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The debate is open, we will see if the evolution is towards more reduced rates or towards greater barriers for the approval of this type of credits, although this reduces the agility and simplicity that now characterize them. What is clear, and this should not be debated, is that the information that appears on the website where loans of this type are requested must be clear and truthful.

In short, in a specific problem of lack of liquidity I can be interested in a loan of 200 Euros, which I will return as soon as I receive my next payroll. Is the interest high? Yes, but I accept it and consciously decide to accept it. The problem is not that the interest is high, the problem is that you hire a loan of this type without knowing it. Therefore, make sure that before giving your agreement to a loan, you are informed of the total cost you are going to have, the resulting APR, the repayment term and the consequences of not returning the loan within the accepted term. If you do not have all the information regarding your loan, do not accept it.

We take this opportunity to include some related links of interest, such as the current legislation in Spain, where you can check your rights and the obligations of the lenders, and the Spanish Association of Microloans, where the associated lenders commit themselves to responsible financing:

Law 22/2007, of July 11, on Distance Marketing of Financial Services Destined for Consumers
Law 16/2011, of June 24, on Contracts of Credits for Consumption
Spanish Association of Microloans
Code of good practices of the AEMIP

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