When taking out a loan, it matters whether you pay back four times the original sum, or just one and a half times. Recognising this, Provident Financial plans to add further explanatory text to its adverts for its instant loan services. The company's management decided to do this following legislation that would oblige lenders to indicate the total cost of a loan. In their case, the figure would be alarmingly high, at 438 per cent.
It has been obligatory to indicate the total cost of all loans with a duration greater than three months since the beginning of last year.
The figure must include not just interest payments, but also handling and other fees. Balázs Pap, the chief executive of Provident, gave the example of a HUF50,000 loan of six months' duration with weekly repayments, where the weekly fee would be HUF2890, or 50 per cent. For a loan of a year's duration, this would be HUF86,320, or HUF1660 a week, making for a total fee of 72 per cent. So Provident's loans are not cheap, but nor are they as expensive as the number they are obliged to display in their adverts would suggest. Most people find it hard to see the contradiction, so Provident explains the difference between the two numbers to every client, according to Mr Pap.
The total cost figure has caused problems elsewhere, too. One example is that of a television costing HUF49990 available with a total loan cost of 30 per cent for loans of both six months and a year. But the true cost of the loan in 8.4 per cent in the case of a six-month loan, and 16.8 per cent in the case of a one-year loan - this is the extra cost above the sum borrowed. The total cost figure gives a false picture, especially in the case of short-term loans, according to Mihály Mokrai, president of the Association of Financial Services Companies, which represents about 100 companies. The Association is campaigning for the rules to be changed, thus far without success.