Bolivia Transparency Part 3: Transparency in Loan Contracts & Publicity
Today, I’d like to continue my previous post on interest rate disclosure to clients and the general public, and share some insights on transparency in loan contracts and publicity.
While interest rates are freely negotiated between both parties, the loan contracts have to include several pricing details. As a minimum requirement, the contract has to specify the:
- loan amount
- details of all financial charges
- whether the interest rate is fixed or variable and its value at disbursement
- the periodic interest rate and the corresponding annual rate (TEAC)
- the method used to calculate the balances of the financial operation, as well as the calculation method of any financial charges
- the amount of credit service charge and cumulative total of payments, as well as the penal interest to be applied in case of default
- any insurance fees if applicable
- The contract also has to include the corresponding repayment schedule.
- In the case of variable interest rates, the loan contract must specify the variation and how the reference rate will be applied.
The contract also has to detail the borrower’s rights and obligations. Among the client’s right are the right to receive any information related to the transaction at any point during the loan term, as well as the right to make extra repayments or completely cancel the remaining balance at any point prior to the expiration of the loan term without any charge, fee or penalty.
Additionally, the financial institution must present a repayment schedule to the client and explain the scope of this planned schedule of credit service, any effects of variable interest rates, the total amount of payments as well as the calculation method of the financial charges and the corresponding annual rate (TEAC). It would be really interesting to see this in practice and, for example, to evaluate the effectiveness through ghost shoppers.
When a financial institution uses the interest rate to promote its services and publishes written, oral or visual advertisements in the mass media, it is required to refer to the annual nominal rate, specifying any additional commissions and charges. These details must be of a required size, format and importance in the publicity so that they are clearly legible and comprehensible. I will look for some examples to share, so we can evaluate how this plays out in practice.
Please check back soon for the next part of this series, highlighting how MFTransparency’s pricing data is complementary to the current regulation in place.