The European Directive introduces a new approach to consumer lending
The new EU Consumer Credit Directive 2023/2025, adopted on October 18, 2023, is set to reshape the future of consumer lending across all EU member states. It mandates each country to align its national laws with the directive’s provisions within two years and to implement them within three.
The directive’s core focus is on better consumer protection and promoting responsible lending. It requires creditors to act in the best interest of borrowers by offering clear, comprehensive, and upfront information about the terms of the loan. Risky or misleading advertising practices will no longer be tolerated, and the rules governing lender-consumer relationships are being made more precise. The directive updates the existing 2008 rules, adapting them to today's digital and economic landscape, with a goal of creating a more transparent and fair credit environment in the EU.
Updates to Bulgarian Legislation
Bulgaria’s current Consumer Credit Act already includes many of the directive’s basic principles. However, several updates are required:
- Loan scope adjustments: The directive expands the range of credit agreements it applies to. The minimum credit amount is removed, covering even small loans. The maximum amount increases to approximately BGN 196,000.
- Advertising standards: Stricter guidelines on how credit offers can be promoted.
- Creditworthiness assessment: Stronger requirements for evaluating a consumer’s ability to repay a loan.
- Transparency and information: Creditors must provide clearer and more accessible information before a credit agreement is signed.
Key Changes Introduced by the Directive
1. Free and Transparent Information
Lenders and credit intermediaries must provide enough clear and understandable information to allow consumers to compare and assess loan offers effectively. This includes sufficient time to make an informed decision.
2. Advertising Rules
Credit advertising must now include standard, accurate, and clear information. A mandatory warning must be displayed:
"Warning! Borrowing money costs money."
This approach mirrors warnings used in gambling and tobacco advertising. Moreover, advertisements must not:
- Suggest that taking a loan will improve the consumer's financial situation;
- Mislead consumers about how existing loans or credit databases affect their credit rating;
- Claim that loans increase financial resources or act as savings alternatives.
Member states may also restrict promotions that emphasize how quick and easy it is to get a loan.
3. Prohibition of Unsolicited Credit Offers
Pre-approved or unsolicited loans that are not requested in writing by the consumer are banned.
4. Comprehensive Credit Assessment
To prevent irresponsible lending and over-indebtedness, creditors must perform thorough affordability checks. Credit may only be granted if there's a high likelihood that the borrower can repay it. If a high risk of over-indebtedness is identified, lenders must direct the consumer to accessible and affordable debt advisory services.
Credit providers are also required to maintain and regularly review detailed procedures for risk assessment.
5. Right of Withdrawal, Early Termination, and Repayment
Consumers retain the right to withdraw from a loan agreement within 14 days by notifying the lender. In case of withdrawal, interest must be calculated clearly on a daily basis. Consumers can also make partial or full early repayments at any time, with a proportional reduction in total loan costs.
6. Interest Rate Caps and Cost Limits
The directive introduces a cap on total credit costs, including all fees and interest, which must be factored into the Annual Percentage Rate (APR). Member states must adopt measures to prevent abusive pricing practices and may even prohibit certain fees to protect consumers.
7. Debt Advisory Services
Consumers struggling with loan repayments must have access to independent debt advisory services. These should be easy to access and affordable. Lenders are also responsible for detecting early signs of financial distress and guiding consumers toward help.
8. Staff Competence and Training
Lenders must ensure their staff possess the necessary knowledge to provide credit services responsibly. Supervisory authorities will oversee ongoing training to maintain a high level of service and consumer protection.
In Summary: A New Era for Consumer Credit
This directive lays the foundation for a more sustainable and consumer-friendly credit market across the EU. It fosters fairness and transparency, requiring creditors to build better relationships with their clients and uphold the principles of responsible lending. Ultimately, it transforms the credit agreement into a balanced deal—beneficial for both the lender and the consumer.