As part of its response to the coronavirus pandemic, the National Bank of Hungary has decided to extend the customer friendly certification to personal loans as well that they introduced for mortgage loans in 2017. As the APR freeze will expire after January 1 2021, it is a priority of the National Bank to make sure that the market of personal loans can perform their role in financing households in an economical, transparent and efficient way. In their study published on April 14, the National Bank outline show the market has changed in the last couple of years, and what they expect from the introduction of the above measures.

Customer friendly mortgage loans

In 2017, the first customer friendly mortgage loans were certified by the National Bank, which intended to increase competition within the mortgage market, enhance transparency and increase comparability of services. Only those loans can be certified which meet the criteria set up by the National Bank, thus mortgage loans with sufficient price transparency, an easy loan application process, no hidden costs and no tie-ins. Within a year, 40% of mortgage loans in Hungary were certified, while 76% of loans had a fixed interest rate.

Changes in the personal loan segment

According to the National Bank’s study, the last couple of years saw an increase in unsecured personal loans with generally higher interest rates than their secured general purpose loan competitors, that raises issues that the National Bank considers adverse. Interest rates are scattered in a causelessly wide zone and the spread is also higher than international benchmark. Different pricing schemes make it harder to compare services available and due to insufficient information available for customers, personal loans are often taken when other more economical, secured loan options would be available. This is especially very harmful, when a personal loan is taken to finance the downpayment of a mortgage loan, causing extreme risk for both the credit institution and the customer.

This is why the National Bank has decided to expand its certification to personal loan products, with the expectation of more competition and a more customer friendly personal loan market. The National Bank also hopes that the measures will enhance the banking sectors digitalization efforts resulting in a more efficient operation.

The above measures and other efforts to help debtors affected by the coronavirus crisis will probably increase the importance of developing and maintaining a sophisticated credit rating system as the ability to identify creditworthy clients will be more crucial. Credit institutions which offer a transparent service and easy digital solution may also generate a competitive advantage. More transparency and more customer-friendly services catalysed by the National Banks certification may also increase trust and credulity towards the personal loans sector, that could help market players address new, financially conscious and creditworthy customers.