You might have heard about payday loans from seeing advertising on TV or online. These types of loans are becoming a worldwide phenomenon and most recently, it has started to become prolific in Nordic countries.
Since the countries in this region have very low public debt and AAA debt ratings, the cost of borrowing is low in these countries. For example, Norway has a sovereign wealth fund which holds $820 billion, meaning the country has zero net debt.
This low cost of finance has led to an explosion in consumer debt, such as pay day loans.
What are Payday loans?
Payday loans are a type of short term loan, that is secured by the borrowers pay check and charges a very high interest rate. The borrower typically pays back the loan on the next pay date, but the amount can be refinanced for another period by paying a fee.
The appeal of these payday loans is that money can be loaned fast, and the credit check requirements are lax. This has made payday loans popular with individuals who have bad credit or lower income and are unable to access other forms of borrowing, such as credit cards.
The Problem with Payday loans
The lenders associated with payday loans have gained a bad reputation for lending practices which could be considered predatory. Often they are targeted towards individuals who are low income and have bad credit. The terms of the loan aren’t made clear, and the interest rates when annualized can be as high as 900%. According to a Swedish website that compares payday loans, there are a list of loan companies that offer interest free payday loans, but if not paid back within the given time frame, a very high interest rate will apply instead.
As a result, these loans are never fully paid back and these individuals are stuck in a debt trap of paying monthly fees.
Growing Debt in Nordic Countries
The debt numbers have exploded in Nordic countries over the past few years. In particular, Sweden had the number of payday loan companies more than double within 5 years. According the Swedish FSA, the number of payday loan companies in 2006 was 95. Five years later it was 277!
Also, another alarming statistic is the number of payday loans that are not repaid. From 2011 to 2012 the amount of unpaid payday loans increased by 62 percent.
In fact, the amount of personal debt across Nordic countries is some of the highest in the world. According to OECD statistics from 2013, the amount of personal debt that households in Denmark hold is 320% of their income. In the Netherlands, households have personal debt that is 290% of their household income. Norway have personal debt levels which are 215% of household income.
By comparison, the US have personal debt levels that are 111% of household income.
What Should Be Done About Payday Loans
The lax oversight should be replaced with more stringent regulation. The Swedish FSA has indicated that they will make it harder for these companies to be established, and licenses and be revoked if they do not follow regulations.
As a consumer, you can avoid this type of finance completely. If you are an individual with good credit, there are better ways to obtain financing if you need it.