Introduction to consumer loan related issues + interest and loan payment calculators
On January 1, 2002 the law No. 321/2001 Coll., describing some conditions relevant to consumer loan applications took legal effect (the Consumer loan law, describing specific conditions and contractual regulations that must be observed during consumer loan negotiation process). This law also specifies some conditions relevant to commercials and advertisements offering consumer loans and partially specifies regulations relevant to premature loan payoff, as well as other relevant conditions. Consumer loan contracts must be done in writing and must contain all legally required items and information (e.g. the total loan amount, amount of each applicable payment or other relevant payments; the applicable PAECL, regulations describing the establishment of PAECL, which must not be based only on the creditor requirements; information relevant to fines if one of the involved parties fails to comply with its contractual obligations; regulations describing premature/early loan payoff, method of payments, as well as other relevant regulations). The PAECL is used to compare loan offers. In case of a consumer loan, where the PAECL may not be determined, the creditor is obligated to include in the loan contract the maximum loan amount, amount of payments and relevant loan regulations and conditions that allow and specify how to modify the applicable payments. This law represents unification of the Czech legal modification with the laws of the European Union. The Czech Trade Inspectorate supervises, whether the applicable regulations described by this law are observed.
However, all consumer loan applicants should be careful and alert when applying for consumer loan. The potential debtor must receive in writing all applicable regulations and information included in the loan contract for review. After the loan applicant receives the written loan contract proposal, including all inseparable appendixes, it is important that he gets thoroughly familiarized with the text of the contract, so he can make an educated decision whether to accepts and sign the loan contract or not.
Under no circumstances, the debtor should accept contract and all inseparable appendixes that he doesn't understand or is not familiar with. After the loan applicant received the written copy, it is only up to him how much time he will spend reading and evaluating the contract, whether he decides to discuss the loan contract with other person, etc. Never the loan applicant should act under pressure or try to speed up the process, or agree with the loan proposal due to lack of time. If the creditor is not willing to give the loan applicant sufficient time to study and to get familiar with the written loan contract proposal, as required by the loan applicant, most likely, the creditor is not genuine or reasonable business entity. In such a scenario, the loan applicant should seriously consider and evaluate whether to go into business venture with such creditor or not.
Frequently asked questions relevant to the Consumer Loan Law:
Question: What is the RPSN (PAECL) factor?
Answer: The Proportional annual expense of a consumer loan (PAECL) is one of the economics factors, which shows us what payable policies and terms apply to a particular loan. By using the PAECL we may evaluate how advantageous or disadvantageous the consumer loan is. This factor is used mainly to compare and evaluate loans, which are offered to the consumer. The Consumer loan law states that consumer must be informed about the level or values of this factor. The formula to calculate the PAECL is included in appendix attached to the Consumer loan law. The basic input parameters used to determine the value of this factor is the amount of the loan, date of loan, amount of each monthly payment, fees and other payments and information relevant to the each payable term, to each applicable fee and to other fees, if any.
Question: How can I calculate the PAECL for a particular consumer loan?
Answer: The formula to calculate the PAECL is included in appendix attached to the Rule No. 321/2001 Coll. Because the application of the formula requires the user to utilize method of repeated proximities, the best way is to use special computer program designed for this purpose.
Question: Is the PAECL the same as the annual percentage rate?
Answer: No. These are two totally different factors. The structure of PAECL is different than the structure of the APR factor. The annual percentage rate is calculated by using totally different formula. Therefore, one consumer loan can have one value for the PAECL factor and different value for the APR factor. Unfortunately, the PAECL factor is often confused by the media with the APR factor. For example, the common interpretation of the PAECL is that it is an annual percentage rate, including other fees and payment relevant to the loan. This is completely wrong.
Question: Where can I turn to, if I have doubts whether consumer loan contract includes all applicable and legal properties?
Answer: You can address the Czech Trade Inspectorate, which serves as the supervisory body, monitoring these issues.
Question: Where can I turn to, if I have doubts whether an advertisement or a consumer loan proposal includes all properties in accordance with the Consumer loan law?
Answer: You can address the Czech Trade Inspectorate, which serves as the supervisory body, monitoring these issues.
Question: Can I (the borrower) somehow profit or benefit from the fact that the contract that I have does not include all necessary and required properties?
Answer: If a consumer loan contract does not comply with some requirements, as described by Rule No. 321/2001 Coll., and the consumer decides to claim such discrepancy, the consumer loan should still be considered as loan bearing the discounted interest rate issued by the Czech National Bank, valid on the day of the loan contract conclusions. The discounted rate of the Czech National Bank is usually the lowest of all interest rates. Also regulations and provisions relevant to other payments of the consumer loan shall become invalid. This regulation represents a certain penalty for the creditor but on the other hand, it gives the consumer an option to financially benefit from the inconsistency of the creditor (in most cases, the original interest rate is higher than the discounted rate of the Czech National Bank, therefore it represents a decrease in the loan payments).
Question: How the creditor may be punished if the loan contract does not include all necessary properties and regulations required by the law?
Answer: If the creditor fails to comply with regulations required by the law, the Czech Trade Inspectorate may impose a fine in the amount of up to CZK 1 million (should the creditor repeatedly fail to comply with his obligation during one year, the fine may be increased up to CZK 2 millions).
Other repercussion affecting the creditor may be, for example, the responsibility of the creditor to lower loan monthly or other repetitive loan payments accordingly (or not to charge other payments). See the question above.
Question: Does the Consumer loan law apply to all consumer loans?
Answer: Some loans are excluded from this law. The Consumer loan law does not apply to these following types of loans:
- consumer loan for purchase, construction, repair or maintenance of a real-estate
- consumer loan based on lease or rental agreement, which does not guarantee transfer of ownership rights after certain time period has passed
- consumer loan without interest rate or other form of profit raising tools (that is if the total sum of all paid payments that must be paid by the borrower equals to the original amount of the offered loan)
- consumer loan used for continuous distribution of services
- consumer loan below CZK 5 thousands and above CZK 800 thousands.
- consumer loan, payable within 3 months (maximum), or payable in four instalments stretched over maximum of 12 months.
Question: Does the Consumer loan law apply to loan contracts concluded before January 1, 2002?
Answer: No. Legal relations binding before January 1, 2002 (that is before the law took legal effect) shall be governed by current regulations, which means, that these regulations are not subjected to the Consumer loan law.
Question: Is leasing considered a consumer loan?
Answer: Yes. Leasing is a type of a consumer loan. Leasing or lease contract (relevant to financial leasing) is a contract that is subjected to the Consumer loan law. Also commercial advertisements offering lease contracts must comply with requirements of this law. The Consumer loan law does not apply to operative lease contracts.
Question: What items are used in the PAECL calculation process?
Answer: During the calculations process of the PAECL, items such as payments, the principal loan amount, interests and also other expenses relevant to the consumer loan, as described by the consumer loan law, are included (however, the law does not specify these payments as fixed amounts). Sample items used in the PAECL calculation process:
- fees relevant to the contract conclusion process (e.g. administrative fees)
- fees relevant to the loan and evaluation process
- transfer fees and loan accountant maintenance fees, if these are too high and the consumer does not have an option to select different method of payment
- insurance or warranty payments or fees, if it concerns fees or warranty policy payments, ensuring that the loan will be paid off even if the borrower dies or becomes physically disabled, incapable of working or unemployed
- buyout price relevant to the subject of the lease contract (purchase price paid by the lease holder to the lessor. (when this price is paid off, the lease holder becomes the owner of the subject of the lease contract)
- others...
Question: Must accountant maintenance fees, relevant to the account that is used to pay off the loan, be always included in the calculation process of the PAECL?
Answer: The Consumer loan law specifies that account maintenance fees must be included in the calculation process of the PAECL, only if these fees are too high and the consumer has no option to select different methods of payment.
Question: Must every consumer loan contract include the PAECL?
Answer: No. We cannot establish the PAECL for some types of consumer loan contracts. For example, in situations when we do not know the amount and dates of the future payments in advance. However, the law describes such situations. In such scenario, the contract cannot include the PAECL of course. (The PAECL may be calculated only if you have available all necessary input data and information, so you can enter them into the PAECL calculation formula).
Question: Must every commercial advertisement offering consumer loans include the PAECL?
Answer: No. Only such consumer loan advertisement, which contains the applicable percentage rate (regardless if it is yearly, monthly or weekly or other time-limited interest), or any other information relevant to expenses in connection with the loan, must include the PAECL or an example of the PAECL calculation process (the law considers both options, either including the PAECL in the commercial advertisement or including the method of the PAECL calculation process as equal). Advertisements for consumer loans, for which the PAECL cannot be determined, may not (as it is not possible) include the PAECL calculation process, not even in cases when such loan comes with interest rate or includes expenses relevant to the consumer loan account.
Question: How precisely must be the PAECL calculated and shown?
Answer: As described by the applicable law, the PAECL must be calculated with precision of a least one decimal.
Question: What factors, besides the PAECL, are used most often in order to evaluate how convenient or inconvenient a particular loan is?
Answer: Besides the PAECL, the factor used most often is the percentage rate, either annual, monthly or weekly rate (sporadically we may see loans with quarterly or daily interest rates and sometimes even interest rates paid on half a year basis). Sometimes, the payable terms of the loan are expressed by the increase ratio. The Consumer loan law does not require including these factors in commercial advertisements. The use of these factors depends only on the creditor or on other participating parties/persons.
Question: Does the Consumer loan law specify the maximum or limiting value of the PAECL?
Answer: No. The Consumer loan law specifies that the PAECL must be calculated by using the formula included in the appendix of the Consumer loan law and that the calculated value must be included in the applicable commercial or advertisement. The actual value of the PAECL must correspond with the actual payable conditions or terms, which have been agreed upon between the creditor and the consumer (or which are offered by the creditor). Regulations describing payable conditions shall be an issue between the creditor and borrower only. The Consumer loan law does not limit this relationship in any way.
The purpose of the Consumer loan law is to make sure that the borrower has all available information about the offered loan, including all data relevant to the payable conditions and payment schedules. (For example, if the contract contains inadequate or disadvantageous regulations negatively affecting the borrower and may even cause the contract to be deemed invalid, then such issues or disputes shall be forwarded to the applicable court of law. If the borrower feels that the loan contract falls under the profiteering category, then such matter shall be forwarded to the applicable criminal court or authorities).
Question: Must the consumer loan contract include applicable increases or total sum of all payments plus other relevant fees or payments that need to be paid by the borrower in accordance with the loan contract?
Answer: No. The Consumer loan law does not require including such responsibility.
Question: Must the loan contract include and show the "annual percentage rate?"
Answer: No. The Consumer loan law does not include responsibility to include the annual percentage rate or other percentage rates, based on different time periods (for example, weekly or monthly rates, etc.). If the creditor includes the applicable percentage rate, it is completely up to his discretion what type of percentage rate he will include in the contract (annual, monthly, weekly or other type of percentage rate).
Question: What are the benefits of the PAECL against the APR?
Answer: There are two main benefits:
- During the calculations process of the PAECL, items such as payments, the principal loan amount and interests are included in the calculations but also other payments relevant to other expenses, described by the Consumer loan law are included.
- All creditors are obligated to include the Proportional annual expenses for consumer loan (PEACL) on annual bases, which enables consumers to navigate through the financial market easier. (The factor "interest rate" shows interest rate that is calculated on different basis, for example, on annual, monthly, weekly or other basis, which can make the navigation through the loan market harder for some consumers.)
Question: It is true that if the consumer loan is paid off before its mature date, the creditor has no right to require the consumer/borrower to pay a fine or compensation for paying the loan earlier?
Answer: The Consumer loan law gives the consumer right to pay off loans before its mature date. In such scenario, the consumer has the right to request decrease in payments relevant to the consumer loan by such amount that would ensure that by repaying the loan in full earlier, neither party would gain an unfair benefit against the other participating party. Therefore, the law enables the creditor to require borrower to pay him an adequate compensation relevant to the unpaid loan principal and applicable interests, due to the fact that the consumer paid off the loan earlier. However, the level of the compensation must be determined in such a way, so the creditor will not gain an unfair benefit against the borrower.
FULL TEXT OF THE LAW: The complete text of the Rule No. 321/2001 Coll., describing some conditions and regulations relevant to consumer loan application and negotiation process and Rule No. 64/1986 Coll., may be found at:here.
LOAN AND INTEREST CALCULATORS:
To calculate the annual percentage expense rate relevant to consumer loan, you may use the following calculators:
If all payments are the same and are paid in regular intervals, you may fill out the simple chart version.
If the loan payments are different or are required to be paid in different time intervals, use this chart enabling you to calculate up to 130 individual payments.
You may also use identical program in the MS Excel format.
Should you have any questions, please use this email address here.