Fast loan firms milk debtor till last drop


Many are the means developed by fast loan providers to make extra money on those late with payments – for instance, creating a debt collecting company of their own. A bill now in pipeline is trying to set a ceiling to debt proceeding costs.

«One way for firms to earn extra income on clients owing them money is asking for huge collection fee and sending loads of paid letters and notices,» explained justice ministry private law expert Kristiina Koll.

Another option is to keep sending the letters and sending the claim debt collectors while lender and borrower are debating essential issues – a task for the courts – or the parties have already agreed about payment of the debt.

If loan provider and debt collector have the same owner, loans may be granted to people unlikely to ever pay. «That means they can already count on collection fees as they sign the loan contract,» said Ms Koll.

It is rather widespread for SMS-loan companies to run a parallel debt collecting firm. This is the very business of Estonian fast loan providers. 

«Why are such links created? Well, as a rule, this is so there would be no difference if the money goes to the left pocket or the right,» explained Ivar Tammemäe, CEO of Intrum Justitia only in debt collection business. «When lending to people not eligible, lenders develop the option and temptation to excessively increase the collateral claims share. Obviously, enterprises based on international capital are more careful with their image than those built on local capital.»

Inkassokeskus OÜ belongs to the fast loan firm Raha24 and was established three years ago. «Inkassokeskus [meaning: debt collection centre – edit] grew out of the Raha24 debt proceeding department with the goal to offer debt collection services to Estonian enterprises,» said Martin Kolu, shareholder in both companies. About seven percent of Raha24’s loans reach Inkassokeskus, years ago the percentage was 30.   

As specified in Raha24 price list, a letter informing debtor costs the latter €14.

SMS Laen has set a condition that if a payment is late for eight days or more, proceeding costs begin at €10; with 22 days or more, the costs start at €25; if the days are 36 or longer, at least €45 have to be paid. A letter to remind client costs the latter €10.

SMS Raha asks €12 for the first two letters-reminders, the third will be €12; and SMS message or e-mail costs €5.

«Two months running I drew €300 as SMS loans. With the first, I crossed the deadline, but the deadline of the second had not yet arrived when I paid them both. All in all, I paid back €761.20,» recalls a borrower, thinking of his encounter with the fast loan firm’s debt collection company. In less than two months, borrowing €600 thus cost him €161.20.

According to Kristiina Koll at justice ministry, some fast loaners ask too much on collection. «Not all cases in the sample included collection costs, but where these had been awarded by courts it turned out the overall average was €94, but the median was €38,» said she, disclosing results of a study done by the ministry.

The bill under discussion would cap collection costs at €5 for a letter and €50 per claim. Debt collation company owner Martin Kolu thinks the limits would be no blessing, rather increasing the amount of court actions.

«Considering the costs related to proceedings (employees, background searches, publishing payment defaults, sending letters etc) which exceed the planned allowable collection costs, the companies will be sending more claims straight to court no longer trying to reach agreement with the client,» predicted Mr Kolu.

As assessed by Mr Kolu, thus the borrower would lose out – the one they attempt to protect. Mr Kolu said it looked like Inkassokeskus would be forced to lay off most of its staff. As assured by the owner, Inkassokeskus is yet to make profit in all these three years. Last year’s loss was €101,000.

Intrum Justitia’s CEO Ivar Tammemäe, however, is satisfied that the will is not there to cap collection costs for private persons – the amendment regarding company debts was passed years ago. «It’s abnormal for private persons to be in a weaker position that a company. The more so that with many people, debt awareness is rather nonexistent,» said Mr Tammemäe.

The bill putting a cap in collection costs will come before government as soon as at all possible. Yesterday, the government approved ban on fast loan ads in radio and TV. On October 23rd, a bill prescribing ceiling on annual percentage rate and banning use of arbitral tribunal with consumer debates was at its first reading in Riigikogu.