Usury rate, both sides of the coin

Usury rate, both sides of the coin

Establishing a maximum usury rate in the country for credit cards and other loans has divided specialists into two camps.

Yesterday, the deputies approved a motion to limit usury, establishing as a limit 2.2 times the Active Interest Rate of the Financial System, that is, as of today, it would be 30.18% for loans in colonies and 15.43% in dollars.

This is good news for those who support the plan because having a cap on interest rates would allow people not to pay high rates for their future loans.

“It is necessary to prevent certain people with financing needs for basic needs from paying such high-interest rates because they become financial slaves,” said Roxana Morales, an economist at the National University.

However, one of the concerns of opponents of the initiative is the exclusion of users from the financial system and from regulated entities, as those with poor repayment ratings would not be able to borrow in the regulated and legal financial sector, and would have to resort to informal options, where interest rates maybe even higher.

Proponents of the project respond that this exclusion has already occurred, as people with poor credit histories have been left out of the financial system for the same reason before the ceiling on rates is set.

As for the alternative proposals to the project, the experts against the plan point to segmentation by type of financial product and propose some type of regulation that allows a little more control in the unregulated but legal entities.

In this way, the Office of the Credit Information Center could have the complete picture and thus understand the real levels of indebtedness.

“We must remember that each product has a cost, and operating expense, among others. You can’t treat a credit card the same as a house, lot or car,” said Daniel Suchar, an economic analyst.

Both sides agree on the importance of financial education for Costa Ricans, as debt levels have increased significantly in recent years; however, this would not be the definitive solution.

The increase in Costa Rican households has been significant; 60% face at least one debt and monthly payments for this concept reach an average of ยข200 thousand.

This represents an expenditure of more than a fifth of the average gross income of households, according to the most recent 2018 National Household Income and Expenditure Survey (Encuesta Nacional de Ingresos y Gastos de los Hogares).

It highlights that 30% of indebtedness is contracted with commercial companies, followed by 28.7% of other loans with banks, 14.2% in housing loans, 9.8% in credit cards and 9% with lenders.

So put a brake on usury rates, while it would apply to new loans, it would give a respite to the economy of Costa Rican households, according to experts who support the cap.

SHOULD THERE BE A CAP?

Putting a cap on interest rates has divided opinions in the financial sector, know more about the benefits and cons of the bill, according to experts consulted.

Pros

The cap is not fixed depending on market conditions and has a rate as a reference.

Respite to the debtor although it does not apply retroactively, the new credits would have the benefit in the future.

Right to defense would apply to formal, informal and lender entities

Cons

The exclusion would evaluate people, and those who are in a bad payment category for the entity would be excluded and led to informality.

Stop everything there is no segmentation between products, which can be positive or negative

It violates the freedom of competition under the law, can be regulated when there is monopoly and oligopolies. In Costa Rica, there are more than 60 financing options.

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