On the 9th of this month, Cream Bank published the average personal interest rates on new loans to non-financial corporations and individuals for June 2016. Again, the numbers fell and approached all-time lows, following the Eurozone trend as a whole.
We use this new data to ask two questions: on the one hand, how does this influence consumer credit in Portugal and on the other, for you as a consumer, how is this beneficial? Find out the answer.
Why do we talk about interest rates on personal credit?
Interest rates on personal credit are the amount a financial institution receives in return for lending money to its customers. When you buy a car or your first home, or even when you need to do homework and ask for financing, the bank lends you the money you need in exchange for the interest rate you will pay.
In this sense, interest rates on personal credit making the remuneration of banks for being willing to spend that amount to lend. Legend has it that at the time of the Roman Empire, interest was charged for loaning seeds and other agricultural goods to traders. But how has the situation in our country evolved and what historical moments can stand out as influencing our interest rates on personal credit?
The story is also made of numbers.
The graph below shows the evolution of the average interest rate on loans to individuals for consumption since the 1990s, and the values presented correspond to those of December of each year (2016 being for June):
Looking at the figure, it is possible to see a downward trend in interest rates on personal payday loans since 1990, and since 2000 they have remained at around 8% to 10%. It is then important to try to understand what may be behind this fall, if this occurrence is a good sign for the Portuguese economy and how it is reflected in the purchasing power of consumers.
The ‘crazy 90s’
This was the golden age of the consumption boom (which many call “the time of the fat cows”). A high demand for credit in a country that had emerged from forty years of led dictatorship to interest rates on personal credit exceeds 24%. It was the time of financial liberalization in Portugal, with increased competition in the banking sector.
The renewed hope that came from joining the European Union also certainly contributed to a high expectation in the economy. Increased competition in banking has also led to more financial solutions and products. Everyone bought something and everything, and American credit card fashion is here to stay.
The turn of the millennium has come… What happened?
There is no peak without a fall. At 31 January 2000, the bank interest rate on consumer credit granted to households was then 9.70% – a decrease of around 14% in ten years. In 2002, Portugal adopted the Euro as the new official currency, leaving behind the Shield, which naturally led to changes in interest rates and, above all, in the economy as a whole.
From 2000 to 2010: the decade when everything changed
Politically and economically, there were ten years of change (and consequences). Average interest rates on consumer credit by consumer credit institutions ranged from 8% to 10% until January 2010, when the figure dropped to 7.80%. These were times of weak GDP growth and accentuated structural macroeconomic imbalances, due to factors such as the aging of the population, which led to declines in productivity, among other causes.
Therefore, although it was a period of many social, political and economic transformations, there were no major swings in interest rate values on personal credit – banks were adjusting to demand. This was greatly contributed by Bank of Portugal, which now set the maximum rates that institutions must respect under the new personal credit agreements.
2011: when it all fell apart
Which Portuguese does not remember that fateful year when the government called for a financial rescue from the Troika and fell shortly thereafter? In May 2011, the Economic and Financial Assistance Program (PAEF) became a reality in the Lusitanian economy. In December this year, the interest rate on consumer credit was then at 10.04%, up 2% since the beginning of 2010.
And from 2014 it was always going down…
As a result of reforms aimed at solving the structural problems of the Portuguese economy, household consumption fell sharply (which was naturally a consequence of the high unemployment rate that put pressure on the effort rate), leading to a drop in bank loan interest rates.
Nowadays: it is the consumer who wins
In June 2016, the average interest rate that banks used to make consumer credit was 7.45%, the lowest ever, corresponding to a volume of 326 million dollars of new consumer transactions. This means that we have more credit granted at a lower interest rate, which makes perfect sense, consumers are interested in having lower interest rates.
Depending on the BoP itself, loans for consumer durables (such as automobiles) have grown at a very rapid pace over the past two decades. The limits imposed by this entity on the interest rates that banks can set greatly favored consumers, which naturally helped this growth.
How are interest rates fixed?
Throughout their lives, households use bank loans to meet their investment and / or consumption needs. Credit is essential in an economy, as it allows individuals who do not have properly stuffed portfolios to aim to acquire assets that they otherwise would not be able to do – in this sense, it helps to alleviate existing income asymmetries (ie the gap between rich and poor).
In the first instance, bank interest rates are set by the monetary authorities (ie the central banks of each country. In the case of Portugal and all Eurozone countries, this maximum entity is the Europe Revo Banks). ). But ultimately, it is people who strongly determine and influence them through their consumption decisions.
Firms themselves affect interest rates through their expectations of economic growth: if they are positive and confident, they will be more willing to invest and therefore will borrow more. In fact, interest rates are dominated by demand rather than supply.
Lower interest rates generate powerful consumption incentives. It is the law of supply and demand working in the path of Adam Smith’s “invisible hand.” Offering a lower interest rate increases the demand for financing.
However, having a low interest rate on loans to households can also be a bad indicator for the economy: it means that people are spending less and may have weakened purchasing power, thus reducing their borrowing. debt capacity. Is what is happening right now?
Let us take our questions through the latest consumer credit values in Portugal:
|AMOUNT OF NEW CONSUMER CREDIT CONTRACTS (2013-2016 | Million dollars)|
|2013||2014||2015||2016 (January – May)|
|Personal credit||1 708||1,889||2 242||1,042|
|Auto credit||970||1,292||1 820||861|
|Credit Cards + Credit Lines||1,026||946||1,015||440|
|TOTAL||3 703 851||4,128,410||5,077,528||1,877,571|
The table above allows us to quickly conclude that consumer credit has been increasing since 2013, a particularly significant increase in personal credit figures, which in the first five months of 2016 alone exceeded 1 billion dollars and last year was over 2 billion dollars.
Interest rates on personal credit: The conclusion is…
Combining the analysis of consumer credit amounts with the setting of the respective interest rate on loans to households to historic lows, it is possible to infer that the fall in interest rates may be strongly boosting Portuguese consumption.
For you as a consumer, this would be a good time to spend more, as the additional amount you pay to the bank is lower, making it less costly to bear the debt. It’s also the perfect time to show how fulfilling you are and improving your credit history, which is so important to increasing your likelihood of getting approved new applications.