Page last updated at 16:32 GMT, Wednesday, 16 January 2008

Loan market to open up across EU

By Alix Kroeger
BBC News, Strasbourg

Shopping bags
The consumer credit market is worth 800bn euros a year

MEPs have backed new rules to standardise lending conditions and make it easier for EU consumers to borrow money across borders.

At the moment, borrowers looking for a loan to buy a car or a television can only get credit in their own countries.

The idea is to allow consumers to compare loans in different states in the European Union.

Two-thirds of EU consumers use credit to make big purchases, whether paying for a wedding or a washing machine.

And lending conditions, including interest rates, the terms for early repayment, and the right to cancel, vary widely across the EU.

Varying interest rates

The average interest rate varies from 6% in Finland to 12% in Portugal, according to the European Commission. In Italy, consumers pay 9.4%, compared with 6.8% in the Irish Republic.

APR to be calculated the same way across Europe
14-day cooling-off period
Right to pay off loan early
1% maximum penalty on amount paid off early
Compensation cannot exceed the interest that would otherwise have been paid

At the moment, the EU consumer credit market is worth 800bn euros (600bn) a year, but only 1% goes across borders.

Under the consumer credit directive, annual percentage rates (APR) will be calculated in the same way across Europe.

EU consumer affairs commissioner, Meglena Kuneva, said it was a "significant step" which would allow consumers to see the real cost of credit.

The directive covers consumer loans between 200 euros (150) and 75,000 euros (56,000) on which interest is paid.

It will not apply to deferred payment cards, such as credit cards and store cards. And it will not cover mortgages or overdrafts which run for less than a month.

Cooling-off period

Once consumers have negotiated a loan, they will have a 14-day cooling-off period in which they can cancel without having to give a reason and without any charge.

Fewer than half of EU countries give consumers this right at the moment.

EU Consumer Commissioner, Meglena Kuneva
The consumer commissioner says the market will be more transparent

Borrowers will have the right to pay off loans early.

Lenders will be able to charge them only 1% of the amount paid off early in compensation. For loans with less than a year to run, compensation to lenders is capped at 0.5%.

So if a consumer takes out a 10,000-euro loan (7,500) to buy a car and pays off 1,000 euros (750) ahead of schedule, the maximum penalty they would have to pay to the lender would be 10 euros.

That compensation cannot exceed the amount of interest the consumer would have paid in the time remaining on the loan.

'More choice'

The new legislation would give consumers more choice and make it easier for banks to do business across borders, Ms Kuneva said.

"Good regulation increases market activity," said British Conservative MEP Malcolm Harbour. But he warned that credit markets were at varying stages of development in the different EU member states.

The German centre-right MEP Kurt Lechner, who drafted the European Parliament's original proposal on the directive, warned that the new rules would increase red tape.

"Just because we have more rules doesn't mean we'll be better protected," he told MEPs.

He drafted the European Parliament's original proposal on the directive which would have tilted the balance away from consumers and towards creditors.

However it was substantially amended by the Parliament.

British Labour MEP Arlene McCarthy, who chairs the Parliament's internal market committee, said labour mobility in Europe had given the legislation "new significance".

The new directive would, she said, make it easier for a Polish plumber working in France or Germany to compare loan offers and get the best deal.

It will now be published in the EU's official journal.

Member states will then have two years to transpose the directive into national law.

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