Options for consumer credit in Brazil
A research made by Jornal O Estado de São Paulo in April this year has shown that Brazilians are close to reach the edge of debt. In order to understand how an entire nation has come to this point, learn how easy it is to buy goods in Brazil even when you don’t have a single penny in your pocket.
Brazilians are no longer capable of paying their bills. According to Serasa Experian, between 2011 and 2012, insolvency is already 18,2% over normal levels.
The organization also says that this number is the direct result of easy credit in a country where people were not used to it, so an empowered consumer allied to very attractive installments created the perfect combination to the current situation Brazilians are facing.
It is part of the Brazilian culture to acquire goods and services and pay for them in several installments, even when the necessary amount of money is available. Most Brazilians think “why will I pay BRL 900,00 if I can pay BRL 100,00 per month?”.
Installments dissolve the price of a good and give the idea that they fit very well into our budget. The problem is that most Brazilians do not pay attention to the interest rates involved in installments and usually forget that they are expected to pay that amount every month for several months.
So what happens is that they end up acquiring other goods, pay them in installments as well and get tricked by the illusion of having money available when, in fact, all their budget is compromised and this is where things start to get complicated.
Also, many stores (like grocery stores, department stores, and so forth) issue boletos or offer their own credit cards and allow the consumer to parcel their purchases in installments as low as BRL 6,00. However, to pay these debts it is required that the consumer goes directly to one of the stores, what many times leads them to a new purchase. Another option is to use the credit card.
Credit cards are also used to pay purchases in installments and just like mentioned before, it can get hard to keep track of all the purchases made in a month, so imagine keeping track of purchases made six months ago?
Credit cards are easy to get and sometimes they are issued even when the consumer has not asked for them. Credit card companies usually work on partnerships with banks and when a customer opens a bank account he immediately receives a credit card. It is up to customers to use it or not and in most cases, they end up using it.
The study “Retail Banking Latin America”, made by Lafferty consultancy established that in 2012, Brazil had 182.192 million credit cards, 275.959 debit cards and 275.385 cards issued by stores.
According to Proteste, which is the Brazilian association to consumer defense, revolving credit is subjected to an interest rate of 237,9% per year. This rate is almost five times higher than Argentina’s, placed in the second position in the ranking of Latin countries, with an interest rate of 50% per year.
As credit cards offer the option of minimum payment (that varies from 5% to 15% of the total value, according to the credit card company) it is very easy to lose control and limit your payment to the minimum amount. At some point, with interest rates of at least 15% a month and up to 463,30% a year, it is impossible to pay the bill, even the minimum amount, that increases every month as it is proportional to the total value. At this point, the consumer will probably be using another credit form: its overdraft limit or, in Portuguese, his “cheque especial”.
Overdraft limit or “cheque especial”
An overdraft occurs when money is withdrawn from a bank account and the available balance goes below zero. In some cases, it works as an intentional short-term loan.
According to Banco Central, the salary of customers relying on overdraft limit in Brazil only lasts eight days. Interest rates charged for this credit modality are of 185% a year. Still according to BC, the profile of the consumer who mostly relies on overdraft limit is:
- Age from 25 to 35 years old;
- No kids;
- Complete high school;
- Monthly income ranging from BRL 700,00 to BRL 2.00,00.
Employee Salary Advance
Many Brazilian companies divide salaries in two installments (usually one of 60% and another one of 40% of the total salary), paid every 15 days. When this is not a common practice in the company, employees can ask for a salary advance, what can be accepted or denied by the employer.
Loans are offered by banks and by financial institutions working exclusively with this modality. Financial loans promote access to a certain amount of money and pay it back in installments with high interest rate levels. In Brazil, the most common types of loan are:
Loan with no credit check
The most advertised one, this type of loan targets individual who are seriously in debt. It may not require any proof of income and/or accept customers who have their tax ID with a negative rate on credit rating bureaus, but on the other hand, it is the option with the highet interest rate, reaching levels of 18,82%.
This is a loan modality in which the parcel value is discounted directly from the payroll. Its positive side is that as the installments are discounted directly from the payroll, there is insolvency risk; on the other hand, it can be very negative in Brazil because lenders target retired people and pensioners who very often do not know much about the process and do not understand how interest rates work, being literally tricked by these lenders and compromising their income much more than what they were expecting to.
- Interest rates: ranging from 2,14% (for retired people and pensioners) to 3,06% (through credit cards).
Also called “evergreen loan”, revolving loans are an arrangement that allows for the loan amount to be withdrawn, repaid, and redrawn again in any manner and any number of times, until the arrangement expires. Credit card loans and overdrafts are revolving loans.
- Interest rates: ranging from 0,66% to 18,82% a month and 8,21% to 691,91% a year.
It is the type of loan in which the financial institution already offers a credit line to the consumer in case he already has a bank account.
- Interest rates: same from revolving loan.
Pledge loans happen when there is the delivery of a personal property to a creditor as a security for a debt or for the performance of an act. To get this loan, the consumer can pledge several types of items. The most common are jewels, such as bracelets, rings, necklace and others.
In Brazil, it is very common to have lenders threatening insolvent customers, claiming that if they do not pay their debts, their house will be auctioned, for example. Having that in mind, here is a list of items that cannot be pledged:
- Furniture considered to be essential to the everyday life of a middle class standard family;
- Clothes, with the exception of the very expensive ones;
- Salary and all sorts of income;
- Books, machines, tools, instruments and other goods essential for the exercise of any profession;
- Life insurance;
- A small rural property as long as it is cultivated by the family;
- The amount deposited in a savings account, as long as it does not surpasses 40 minimum salaries.
Regardless on the type of loan, they are often criticized by consumer unions and defenders of consumer rights as lenders are accused of draining money from low-income communities, exploiting financial hardship for profit and ignoring legal restrictions.
Also, lenders are accused of adopting aggressive advertising and collection practices, such as lying about what goods can effectively be pledged and encouraging the indebted to acquire a loan with a friend or relative in order to pay the debt.
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