European Union citizens are one step closer to having a situation that will make cross-border loans easier and simpler. At least this is what a consumer loans directive adopted on second reading by the European Parliament (EP) on January 16 is suppose to achieve “to stimulate the European market while still protecting consumers”.

The directive covers consumer loans between 200 euro and 75 000 euro, which have to be repaid over more than one month. It will only cover loan contracts, not guarantors and other aspects of loan agreement law. The directive will apply only to loan contracts on which interest is paid and not products such as deferred payment cards (charge cards) and also excludes mortgages.

According to the EP, the new directive aims to harmonise consumer loan contracts in a number of areas, such as the standard information to be included in advertising provided to consumers before contracts are signed and when they are concluded, calculations of the total cost of a loan, the right to cancel and the right to pay off a loan early.

These provisions will allow all EU consumers access to the same information when choosing the best offer in their country or another EU member state. With this information in hand it will be easier for consumers to calculate the total cost of a loan offered by various banks, loan intermediaries or loan institutions. Furthermore the directive will allow consumers to benefit from bank products that are not available in their own country and will make it possible for banks to offer their products to all European citizens, which in return will mean more market opportunities for banks.

The latter would mostly apply to small scale banks since, as in Bulgaria’s case, most domestic banks are currently owned by major banks that have operations in all other EU countries.

Being a directive, its definitions will be standardised EU-wide and will be used as the basis for calculating the annual percentage rate of charge. In 2007 the average rate charged on a consumer loan in the euro area varied from about six per cent in the cheapest country (Finland) to more than 12 per cent in Portugal, the country with the highest interest rate. In Bulgaria the rate varied from nine per cent to little more than 12 per cent while in Italy and Spain it was about 9.4 per cent, 7.1 per cent in France and 6.8 per cent in Ireland, according to EP data.

Advertised as protecting consumers, the directive has as a priority to protect them against taking on too much debt. Such protection will be guaranteed, according to the directive, by the information provided by the lender who will have to assess the solvency of the consumer before concluding a contract.

One of the main provisions in the directive is the right given to the consumer to withdraw and the right to repay the loan early. This means that a right of cancellation within 14 days will apply EU-wide.

Consumers will be given the right to pay off loans early while also entitles the lender to ask for compensation for possible costs, fair and objectively justified, directly linked to early repayment of loans:

“In the event of early repayment of loans the lender will be entitled to fair and objectively justified compensation for possible costs directly linked to early repayment of loans provided that the early repayment falls within a period for which the borrowing rate is fixed,” states the directive.

The compensation for such an early repayment may not exceed one per cent of the amount of loans repaid early, if the period of time between the early repayment and the agreed termination of the loans agreement exceeds one year. “If the period does not exceed one year, the compensation may not exceed 0.5 per cent of the amount of loans repaid early.”

Some of the concerns raised during the debates on the text of the directive were about finding the right balance within all EU member states. As the situation in terms of legal terms and loan habits of households vary from one EU country to another some fear the harmonisation will be extremely difficult.

Some of the critics say that consumers and lenders would face more red tape despite six years of debate to streamline the rules.

UK Independence Party MEP Godfrey Bloom said, as quoted on the EP website, “It is a question of the blind leading the blind and I think that this place which has not managed to audit its own books for nearly 11 years commenting on this is slightly absurd. The fact that you can actually have rules for Bucharest, London and Paris and consumers in those places is absolutely ludicrous.”

Others, such Ireland’s Fianna Fail MEP Eoin Ryan, did not share Bloom’s opinion. “I support the need to update EU legislation in this area since the last time we had a directive on this was in 1987 and certainly the consumer loans market has changed dramatically since then. This directive seeks to introduce a greater level of competition into the 800 billion euro consumer loans market. It will bring legal certainty to consumers, which is absolutely vital if people are to shop around and to look for the best product which suits their needs. It will also help business to compete. When you look at the differences in consumer loans rates around Europe – six per cent in some countries, up to 12 per cent in others – it surely is time that the consumer got a better choice.”

With all the provisions on its agenda lenders will have plenty of time to respond to the new regulation. Now adopted by the European Parliament, the directive must be formally agreed by the European Council and will enter into force on the 20th day following that of its publication in the Official Journal of the EU. Member states have two years from the date of the entry into force to implement this directive.