Increasing consumer loan transparency: The role of the annual percentage rate of charge
Transparency in advertising of consumer loans is not only important for consumer protection reasons, but also for the stability of the financial sector. The average percentage rate of charge (APR) is, in this regard, a highly useful tool as it includes all the costs of a credit and expresses them in a single number, thus makes different loan offers easily comparable for borrowers. In this policy paper we analyse the transparency situation in the Moldovan consumer credit market with a focus on appropriate use of the APR in advertising.
As a benchmark to the situation in Moldova we use two EU member states – Germany and Austria. The comparison is possible because the regulation of consumer credit advertisement in all three countries is based on the same EU Directive 2008/48/EC. It was created to align the regulation in the EU in order to increase consumer protection and create a level playing field. It serves as minimum, which all EU member states and Moldova have to fulfil.
The analysis of the German regulation shows: In addition to the requirement of the Directive, Germany has formulated provisions which go far beyond the standards of the EU Directive. As a result the practical implementation of advertising consumer loans in Germany is very transparent. In particular the competition is focusing on the APR. The APR is mostly shown in first place in advertising, which makes it easy to assess the cost of the credit and compare credit agreements.
In Austria the regulation is very close to the EU Directive and no additional provisions for consumer loans advertising are made. The practice of advertising consumer loans is different from Germany, there is not such a strong focus on the APR. It has to be shown in advertisement but it is often hidden in small print. Therefore, it tends to be harder for consumers to assess the cost of a credit and to compare loans offers. The analysis of the regulation in Moldova shows a picture close to the regulation in Austria. The requirements of the Directive are fulfilled but there are no substantial further requirements. The analysis of practical implementation shows that the transparency is far from ideal. First there is not much of a focus on the APR. We also find that it is used in a misleading way or is missing completely, which is against the law. Therefore, in Moldova we see not only a relatively weak regulation – compared to Germany – but also a weak supervision. What makes matters worse is that the consumer loans segment is growing very fast and has reached an amount, which, in connection with non-transparent lending, could pose a potential risk for financial stability.