The purposeful consumer difference is not different from the non-purposeful one only in name. Both consumer loans are common financial tools that many people use to cover their needs when they are short of funds. How does a consumer purpose loan differ from a non-purpose loan, what must the loan agreement contain and what are your rights if you borrow?
One of the ways we can divide consumer credit is into purpose and non-purpose. Although they may seem similar to you, the legal aspects and conditions are quite different between the two types of loans.
A purpose-built consumer loan is a type of loan that is granted to you by a bank or similar institution for a specific purpose. The most common reasons why people take out a consumer loan are to renovate their home, buy a car, buy a washing machine, a fridge or other household appliances and other specific goods. When you want to borrow in the form of a consumer loan, you need to clearly define what you will use the money for and then provide proof that this has actually happened.
In contrast,a non-purpose consumer loan is not tied to a specific purpose. You can therefore use the funds for anything you want. You could use it to travel the world, pay off other debts or kick-start your career.
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The two types of loans differ not only in what you can use them for, but mainly in the amount you pay in repayment on top of what you borrow. The interest rate is undoubtedly one of the main advantages of a consumer loan. Why, you ask? By giving you a purpose, lenders are more confident that you will use the money for a specific purpose, and the risk of not repaying is greatly reduced. That’s why they can offer you better terms.
Typical borrowers drive a wedge and try to pay off one debt with the other, which is not for a purpose, until they end up in foreclosure or insolvency. In a recent court case, for example, the issue was whether a consumer loan could be secured by a share in a housing association.
On the other hand, a special-purpose loan has the disadvantage that when you use it, you will have to clearly prove to the bank that you actually used the money as defined in the contract. This can make the whole process of arranging the loan longer and more complicated.
The flexibility, less paperwork, faster processing and the fact that you don’t have to prove what you’re getting with the money buys you a higher interest rate with a non-purpose consumer loan. In addition, a non-purpose consumer loan often means a lower overall amount granted.
Tip: Have you borrowed, defaulted and now have a so-called frozen account? Learn how a foreclosure works and how you can get your account unblocked again.
Consumer credit is regulated in the Czech Republic by the Consumer Credit Act. It complies with the European Directive on consumer credit. The Consumer Credit Act lays down the basic rules for how loans can be granted, how they can (not) be advertised and defines consumer protection. But it also contains the obligations of credit providers, as it aims to ensure that everyone who wants to borrow receives clear and sufficient information about all the conditions and risks involved.
The law emphasises transparency and information for consumers. For example, a credit provider must always clearly state all costs associated with a loan, including the annual percentage rate of charge (APR), interest rate and other fees.
Tip: In the case of a consumer purpose loan, also look at how the purpose is described to make sure you will be able to substantiate the defined purpose.
The Consumer Credit Act contains several important measures to protect you as a consumer. These include, for example, the right to withdraw from the contract. This allows you to cancel the loan within 14 days without having to give a reason or explain anything. This measure gives consumers time to consider whether they really want to keep the loan or return it without penalty.
On the other hand, lenders are obliged to assess the creditworthiness of the consumer, i.e. the borrower. The lender itself must therefore assess the risk that the borrowed money will be repaid before the money is lent. If this step is omitted, the contract may be considered void.
The law also includes legal limits on interest rates. In other words, it defines what constitutes usury in order to prevent it. It protects consumers who need to borrow from extremely high interest rates so that they do not become burdened with excessive repayments.
The law also thinks about the fact that you may inherit something, for example, or otherwise come into money that makes you want to use your right to pay off the loan early. You can use this option for both purpose and non-purpose loans. However, be aware that the provider may charge a fee for early repayment. Again, you will find this in your loan agreement. The law sets a maximum amount for this fee.
The provider shall be entitled to reimbursement of necessary and objectively justified costs, which may not exceed 1% of the part of the loan repaid early if the period between the early repayment and the originally agreed repayment of the loan is longer than one year. If the period is less than one year, the reimbursement of costs may not exceed 0,5 % of the part of the loan that has been repaid early. In no case may the reimbursement of costs exceed the amount of interest that the consumer would have paid until the end of the agreed period.
A consumer credit agreement is perhaps a slightly more complicated term for the documents you need to sign when you want to borrow money. According to the aforementioned law, it must contain certain mandatory information. If you are not sure whether the terms of the loan meet your needs or if you have doubts about the contract, we recommend consulting a business law expert. You should always check the following before signing the loan agreement.
If you want to maintain your financial stability and avoid falling into a debt trap, always consider carefully whether you really need the loan in question. If you do, then be clear whether a purpose or non-purpose consumer loan would be better for you. For the purpose-built one, you have to prove that you actually used the money for what you said in the contract. However, you will get a higher amount and lower interest. For the non-purpose one, you don’t have to define or prove anything, but be prepared to pay more because of the interest and you won’t get as high an amount. Always read the loan agreement carefully and consult a lawyer beforehand if you have any doubts or uncertainties.
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