Do you have an overdraft activated on your account? Or did you lease a car? Then you might be wondering if you have committed to a consumer loan. So this time we’ll look at what consumer credit is and what all financial products fall under the term. We’ll also tell you what to look out for and how to check your credit agreement properly.
Consumer credit is a financial product that allows you as an individual to obtain funds to buy goods or services. For example, you can use it to finance a car, buy household equipment and for other personal expenses. This form of credit is regulated by the Consumer Credit Act, which sets out the obligations of providers and the rights of consumers.
It really does not pay to rely on the goodness of the other party, as proven by numerous cases we have handled within our law firm. Before you sign any contract, even a loan contract, have it reviewed by a professional. We will alert you to potential legal pitfalls and risks so you can avoid any unpleasantness.
There are several types of consumer loans on the Czech market. Each of these products has its own specifications and is suitable for use in different situations. Therefore, before choosing a specific loan, always consult a specialist who can help you compare the different offers and find out the total cost.
It is not just a simple matter of borrowing money, as there can be much more behind a consumer loan. So let’s take a look at the most common types.
A purpose loan is tied to a specific use (for example, a mortgage, buying a car, etc.). This type of loan is usually offered by banks and financial institutions at a lower interest rate because they have more assurance that the borrower will use the money in a meaningful way and the risk of default is lower.
If you would like to apply for a special-purpose loan, you will need to prove the purpose of the loan, for example, by means of an invoice or a sales contract. The most common purpose-built loans are mortgages and leases, which allow you to finance a home or car purchase on more favourable terms than a conventional loan. We cover more about the special purpose loan in a separate article.
You can use a non-purpose loan for anything without having to prove to anyone what you did with the money. It is through non-purpose loans that the typical wedge-pulling takes place, where someone borrows, can’t repay, so they take out another loan to pay off the first one until they end up in an endless rut and maybe foreclosure.
Thus, a non-purpose loan is reached for by those who need to get funds quickly without complicated paperwork. The disadvantage of a non-purpose loan is that it carries a higher interest rate than a purpose loan because the lender bears a higher risk of default.
A credit card is a revolving (recurring) loan that can be drawn repeatedly up to an agreed limit. A credit card acts as a kind of financial reserve that you can use at any time and then pay off.
The advantage is that you can take advantage of the interest-free period, which usually lasts 30-55 days and during which the bank does not charge you any interest. However, if you do not repay the amount you owe on time, the interest can be quite high.
With credit cards, banks usually offer various other bonuses such as cashback or loyalty points to entice cardholders to use them.
Leasing is an alternative way of financing movable assets, which is mainly used for the purchase of cars. Leasing is essentially a long-term lease where the customer chooses between an operating or finance lease.
In the case of finance leases, the customer is allowed to keep the item after all the repayments have been made. On the other hand, in the case of an operating lease, he must return it to the leasing company after a certain period of time. The advantage of leasing is that you don’t have to make a large financial down payment to obtain it, but on the other hand it can be quite expensive compared to a conventional loan.
An overdraft is probably quite familiar to you. It is an option to overdraw your current account up to a certain amount. This means you can pay with your debit card and make money transactions even if you no longer have any funds in your account.
This type of credit is very flexible because it allows you to have a financial reserve at any time without having to apply for a new credit. However, the downside can be a higher interest rate and the need to regularly top up your account to avoid getting into permanent overdraft. An overdraft is particularly suitable for short-term financial needs, such as unexpected expenses before payday.
Tip: Wondering what’s the catch to a consumer purpose loan? Find out in our article.
Under the Consumer Credit Act, providers must follow strict rules. Key requirements include:
Compliance with these rules is monitored by the Czech National Bank (CNB), which can impose fines on providers or revoke their licences.
A consumer credit agreement should first of all contain the total amount of the credit and the repayment period. Don’t take their word for it and always check this too, so you don’t sign up to an amount you didn’t originally intend.
Next, look at the APR, the annual percentage rate of charge, which is the main indicator of the true cost of the loan. The APR includes interest rates, application fees, administration fees, money transfer fees and insurance or guarantees in case of default. A loan of CZK 100 000 at 5% interest may have an APR of 7% if it includes arrangement and administration fees. Another loan with the same interest rate but no fees may have an APR of only 5%, which means a lower overall cost.
The contract also includes the interest rate, which is the percentage you pay on top of the amount borrowed, and other fees associated with maintaining the account and similar related costs.
Also read carefully the possible penalties, especially interest on late payments. This is the financial compensation you must pay to the lender if you do not meet your obligations on time. The amount of late payment interest may be governed by a contractual agreement or by law. If there is no specific contractual rate, the legal rate, which corresponds to the Czech National Bank’s repo rate plus 8 percentage points, applies. Currently, the repo rate is 4%, which means that the statutory default interest would be 12% per annum.
Finally, you should also be interested in the early repayment terms and refinancing options. If you prospectively want to repay the loan before the agreed term, make sure that the loan agreement actually allows you to do so.
Tip: Trading on modern online marketplaces also carries risks. Read up on online bazaar scams and don’t repeat the mistakes made by many people before you.
If a person stops managing to pay his or her debts, this can lead to what is known as over-indebtedness. This is most often caused by poor budgeting, too many loans at once or unexpected expenses such as job loss. Underestimating one’s own ability to repay is also a common mistake. If you find yourself in debt trouble, it is important not to delay and to actively seek a solution. You have several options – from loan consolidation, which consolidates multiple debts into one with a lower repayment, to debt restructuring in the form of an agreement with the creditor, to the extreme option of personal bankruptcy. Always do your best to communicate with your creditors and try to agree new repayment terms before the situation becomes untenable.
The best way to prevent over-indebtedness is to be responsible with your finances. When considering a loan, we recommend that you compare offers thoroughly and use online loan calculators, for example. Going into debt for unnecessary things can easily become a trap, so it is wise to only take out loans for truly necessary things. Having at least three months’ worth of expenses in reserve will help you bridge unexpected situations and avoid repayment problems.
You can also get legal advice on consumer loans at our law firm. For example, you can contact us in the following situations:
We can help you analyze the contract, advise you on possible steps to take, and represent you in dealing with the lender or the court if necessary.
Consumer credit is more than just a regular loan – it also includes overdrafts, leases and credit cards. Each type of credit has its own benefits and risks, so it is important to read the contract well and pay attention to the interest, APR or hidden charges. The Consumer Credit Act protects borrowers, ensures transparency of terms and conditions and allows early repayment. However, irresponsible borrowing can lead to a debt trap, so it is crucial to plan credit wisely and consider all financing options.
Our team of experienced attorneys will help you solve any legal issue. Within 24 hours we’ll evaluate your situation and suggest a step-by-step solution, including all costs. The price for this proposal is only CZK 690, and this is refunded to you when you order service from us.
Ondřej is the attorney who came up with the idea of providing legal services online. He's been earning his living through legal services for more than 10 years. He especially likes to help clients who may have given up hope in solving their legal issues at work, for example with real estate transfers or copyright licenses.
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