Effect of consumer safeguards on speedy loans in Estonia
The Estonian quick loan market has seen a major overhaul over the past two decades, particularly after the regulatory reforms in 2015. These changes have significantly altered the market's structure, competitive landscape, and consumer protections, although challenges remain. Let's dive into the key regulations and their effects on the quick loan services sector in Estonia.
The Wild West (2004-2014)
The quick loan market in Estonia took off in 2004, with SMS loans and internet-based services becoming popular. Between 2006 and 2007, there was a noticeable expansion, with quick lenders' marketing expenses rivaling those of commercial banks. During this period, an estimated 200 companies operated with no specific regulations[2].
Prior to 2015, the market was characterized by sky-high interest rates, where the Annual Percentage Rate (APR) could soar past 1,000%[2]. Consumer protection was minimal, and responsible lending principles were not legally binding. The global financial crisis in 2008 caused a temporary contraction, but growth resumed from 2012 onward[2].
The Year of Change (2015)
2015 marked a turning point for the Estonian quick loan market with the introduction of the Creditors and Credit Intermediaries Act (KAVS). This regulation brought sweeping changes to the entire sector and established a new supervisory framework[1].
The KAVS Revolution
The KAVS required all creditors to obtain a license and meet stricter requirements regarding organization, capital, and management. It anchored the principle of responsible lending, obliging creditors to ensure potential borrowers' ability to repay the loan[1]. This includes income verification, analysis of financial obligations, and evaluation of regular expenses[1].
Furthermore, strict advertising restrictions were introduced, mandating standard information in advertisements and prohibiting misleading content[1]. The Consumer Protection and Technical Regulatory Authority (TTJA) oversees compliance with these regulations, but studies show that 88% of quick loan ads still violate the law[1].
The law also placed a cap on APR and demanded transparency in presenting price information. These restrictions eliminated extreme interest rates exceeding 1,000% APR, although Estonian consumer loan interest rates remain higher than the EU average[1].
Market Downsizing
The most apparent effect of the regulation was a drastic reduction in the number of market participants. Out of the approximately 200 companies, only 54 received a license, and this number later stabilized at 44 licensed creditors and 8 credit intermediaries as of 2024[2]. This represents a 78% reduction in the number of market participants[2].
The volume of consumer credit in 2024 was €795 million, a decrease from €832 million in 2023. Creditors issue about two-thirds of the total consumer loan volume. The average small loan amount increased from €817 in Q4 2023 to €1,143 in Q4 2024[2].
Financial Supervision Authority Watch
The Financial Supervision Authority has proven effective in regularly inspecting market participants and identifying violations. As of 2024, there were 44 creditors and 8 intermediaries under the supervision of the Financial Supervision Authority[2]. Supervision has helped curb irresponsible lending, although issues persist[1].
The Bright Side
Positive outcomes of the regulation include market consolidation, elimination of unreliable activities, and the disappearance of extreme interest rates (over 1,000% APR)[1]. The licensing requirement has effectively banned irresponsible and illegal operators[1].
The Downside
Despite regulatory success, several challenges remain. About 10% of the working population struggles with loan debts, and many have multiple or dozens of loans[1]. The principle of responsible lending is not fully functional, as many lenders rely solely on tax authority data without requiring additional documentation[1].
Court cases often reveal that claims are unfounded, as responsible lending principles were not followed when issuing loans[1]. Halting the processing of payment orders against quick loan debtors could threaten the business model of quick loan companies[1].
Comparisons with International Standards
Estonian consumer loan interest rates are significantly higher than the EU average. In 2021, the average interest rate for loans of up to one year in Estonia was 12.16%, compared to about 5% in the EU[1]. According to an economist at the Bank of Estonia, the main reason for high interest rates is a lack of competition[1].
The new EU Consumer Credit Directive (2023/2225) aims to broaden the scope of consumer credit regulation, covering loans under €200 and free loans and leasing agreements[3]. Member states must transpose this directive by November 2025 and implement it from November 2026[3].
Planned Additional Measures
The government plans to impose a complete ban on quick loan advertisements, although this plan has been postponed to the second half of 2025[3]. In addition, a positive credit register is planned, which would allow lenders to check applicants' existing loan obligations[3].
The Credit Collection and Buyers Act (KIOS) introduces further changes to consumer credit regulation, including a new contract amendment regulation and out-of-court restructuring. These changes will roll out in phases, with the final ones in January 2025[3].
Well-known Quick Loan Providers in Estonia
If you've considered quick loan options in Estonia, you've likely noticed the wide variety available. Here are five well-known providers that offer some unique perks:
Bondora
Bondora stands out as one of the most affordable quick loan providers in Estonia. It offers loan amounts ranging from €100 to €10,000 with loan terms from 3-60 months. Interest rates start at 8.99%, and applications can be made conveniently over the phone[4]. Bondora is favorable for those seeking a loan with the lowest possible interest and appreciate a simple, speedy process.
Laenu Pank
For those needing a quick solution for unexpected expenses, Laenu Pank offers a suitable quick loan option. To find your match, simply select the desired loan amount from a slider and fill out the form directly online. You can find a suitable offer and sign the contract digitally, often receiving the funds in your account within minutes[4].
Credit24
Credit24 caters to a broad range of needs, allowing you to borrow between €50 and €10,000 with loan terms ranging from 6-36 months[4]. Credit24 excels in quick disbursements and offers the option of a free payment holiday. You can also open a credit account from which to draw money as needed and utilize a payment holiday in case of emergencies[4].
Ferratum
Ferratum provides the flexibility to draw funds as needed within a set limit. The first 30 days are interest-free, while the total loan cost during this period is only €1[4]. Ferratum appeals to those in need of a small loan quickly and appreciate flexible repayment options.
Monefit
Monefit offers loan amounts from €50 to €3,000 and stands out with a very small minimum loan amount. The loan period ranges from 6-54 months, and interest rates start at 18%[4]. Monefit suits those seeking a minimal loan amount and flexible terms.
Creditstar
Creditstar's history dates back to quick loans via SMS. It offers loan amounts ranging from €50 to €5,000 with loan terms from 1-36 months[4]. Creditstar excels in ease of application and the speedy transfer of funds. Interest rates start at 40%, making it more suitable for short-term loans.
[1] Source: https://www.finantsinspektsioon.ee/eel/andmed-valimis/the-most-significant-changes-in-the-creditors-and-credit-intermediaries-market-and-their-implications/[2] Source: https://www.finantsinspektsioon.ee/eel/andmed-valimis/the-estonian-quick-loan-market-before-and-after-the-creditocracy/[3] Source: https://www.finantsinspektsioon.ee/eel/andmete-ja-analüüsid/krediidi-ja-piiafinantsid/eestis-toimub-pikaleenu-sektor/[4] Source: https://www.loanadvisor.ee/estonia/quick-loans/how-to-get-a-quick-loan-in-estonia/
- The Estonian quick loan market underwent a significant transformation following regulatory reforms in 2015, particularly with the introduction of the Creditors and Credit Intermediaries Act (KAVS), which brought sweeping changes to the entire sector.
- The KAVS established a new supervisory framework and introduced stricter requirements for creditors, such as the need for a license, stricter organization, capital, and management standards, and the anchoring of the principle of responsible lending.
- Responsible lending principles, as enforced by the KAVS, include income verification, analysis of financial obligations, and evaluation of regular expenses, aiming to prevent potential borrowers from taking on loans they cannot repay.
- The regulation also capped APR and mandated transparency in presenting price information, eliminating extreme interest rates exceeding 1,000% APR, although Estonian consumer loan interest rates remain higher than the EU average.
- Despite the success of the regulations, challenges remain, such as the prevalence of loan debts among a significant portion of the working population, issues with the implementation of responsible lending principles, and the potential threat to the business model of quick loan companies from the proposed ban on advertisements.
- Comparisons with international standards reveal that the new EU Consumer Credit Directive (2023/2225) aims to broaden the scope of consumer credit regulation, covering loans under €200 and free loans and leasing agreements, and Member states must implement it from November 2026.
