Consumer credit

What it means

Consumer credit is a loan that a lender provides to a consumer for private purposes, outside their business or profession. It covers ordinary personal loans, credit cards, overdrafts and buying goods in instalments or with deferred payment.

It is governed by a special act that protects the consumer as the weaker party. The lender must provide standardised information in advance, state the annual percentage rate of charge, assess the borrower's ability to repay and respect the right to withdraw from the contract within 14 days without giving a reason.

In Slovakia only banks and firms licensed by the National Bank of Slovakia may grant consumer credit. Only registered financial agents may arrange it, so a retailer offering instalment sales usually works with a licensed credit company.

How it works in practice

For businesses selling goods or services, consumer credit is mainly a way to boost sales. An online store or shop offers instalments or deferred payment through a partner and bears no default risk itself, merely paying a commission or receiving the price from the partner straight away.

If a company offers instalments itself, for example on expensive equipment, it must check whether this amounts to granting consumer credit, which requires a licence. The line between an interest-free payment plan and a loan is not always obvious, and getting it wrong can lead to penalties.

The consumer has a right to early repayment and the lender may only ask for compensation of costs within statutory limits. The agreement must meet the requirements for a consumer contract, so it must not contain unfair terms that disadvantage the borrower.

What to watch out for

The law caps the total cost of credit, and if the cap is exceeded the agreement may be treated as interest-free. Likewise, incorrect or missing information in the agreement can mean the consumer repays only the principal without interest and fees.

A loan granted to a company or a sole trader for business purposes is not consumer credit, and this protection does not apply to it. For sole traders the purpose of the loan is therefore important, because it decides which rules apply.