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Annualized Interest Rates: No More Hide-and-Seek

Apr 13-2021   



All loaning products must explicitly state their annualized interest rates, according to the No.3 notice issued by the People’s Bank of China on March 31st. In a commentary for the Chinese version of Financial Times, Prof. Shen Yan of the NSD believes that this is an important step for protecting financial consumers and signals the convergence with international rules on lenders’ information disclosure. She’s also the Deputy Director of the Institute of Digital Finance at PKU.

 

Lenders of all sizes and shapes – from deposit-taking financial institutions, auto-financing firms, consumer financing firms, to micro-credit lenders and internet platforms displaying advertisements for loaning products – are henceforth required to present annualized interest rates to borrowers in a conspicuous way. The rates are calculated by dividing all borrowing costs by actual principal.

 

The notice was issued against the background that a large number of financial consumers have suffered losses due to lack of information or knowledge of annualized interest rates. Prof. Shen’s investigation shows a borrower unknowingly paid an annualized rate of 36%. The notice, through clear definition of borrowing costs, will help borrowers to avoid an alarming array of hidden costs. For example, some lenders charge the so-called management fees which in effect take a cut on the principal. In one case, a borrower only received 15,741 yuan out of an agreed loan of 17,000 yuan; in another, it was 18,000 yuan out of 20,000 yuan. Their respective annualized simple interest rate would amount to 56.14% and 120.45%, and even higher based on compound interest.

 

While helping financial consumers to stay away from debt traps, the notice also brings lenders’ information disclosure more in line with international rules, as exemplified by the Truth in Lending Act of the US and the Consumer Credit Law in the EU.

 

The notice also provides definitive guidance for settling loaning disputes, which can even puzzle the judicial personnel. On the part of lenders, they are advised to conduct prompt evaluation of their businesses and comply with the new rules.

 

Overall, the rules will add to the welfare of financial consumers and facilitate the healthy operation of China's financial markets in the digital era, says Prof. Shen.

 

Annualized Interest Rates: No More Hide-and-Seek

Apr 13-2021   



All loaning products must explicitly state their annualized interest rates, according to the No.3 notice issued by the People’s Bank of China on March 31st. In a commentary for the Chinese version of Financial Times, Prof. Shen Yan of the NSD believes that this is an important step for protecting financial consumers and signals the convergence with international rules on lenders’ information disclosure. She’s also the Deputy Director of the Institute of Digital Finance at PKU.

 

Lenders of all sizes and shapes – from deposit-taking financial institutions, auto-financing firms, consumer financing firms, to micro-credit lenders and internet platforms displaying advertisements for loaning products – are henceforth required to present annualized interest rates to borrowers in a conspicuous way. The rates are calculated by dividing all borrowing costs by actual principal.

 

The notice was issued against the background that a large number of financial consumers have suffered losses due to lack of information or knowledge of annualized interest rates. Prof. Shen’s investigation shows a borrower unknowingly paid an annualized rate of 36%. The notice, through clear definition of borrowing costs, will help borrowers to avoid an alarming array of hidden costs. For example, some lenders charge the so-called management fees which in effect take a cut on the principal. In one case, a borrower only received 15,741 yuan out of an agreed loan of 17,000 yuan; in another, it was 18,000 yuan out of 20,000 yuan. Their respective annualized simple interest rate would amount to 56.14% and 120.45%, and even higher based on compound interest.

 

While helping financial consumers to stay away from debt traps, the notice also brings lenders’ information disclosure more in line with international rules, as exemplified by the Truth in Lending Act of the US and the Consumer Credit Law in the EU.

 

The notice also provides definitive guidance for settling loaning disputes, which can even puzzle the judicial personnel. On the part of lenders, they are advised to conduct prompt evaluation of their businesses and comply with the new rules.

 

Overall, the rules will add to the welfare of financial consumers and facilitate the healthy operation of China's financial markets in the digital era, says Prof. Shen.