Approximately three percent of the Czech population is contemplating taking out loans to fund their Christmas gifts, a seemingly modest figure that translates to hundreds of thousands of working-age individuals. While the intention may be to enhance the festive season, financial experts are cautioning potential borrowers about the hidden risks associated with such loans.

In a recent analysis by Lukáš Kaňok from Kalkulátor.cz, attention is drawn to the fact that loan repayments extend beyond interest rates, encompassing additional fees that borrowers need to be mindful of. The critical metric in assessing the true cost of a loan is the Annual Percentage Rate of Charge (APR), which encompasses all expenses, including fees for loan initiation, processing applications, and managing the loan account throughout the year.

Kaňok emphasizes that the APR is a pivotal indicator—lower APR values indicate more cost-effective loans. However, he warns that individuals opting for smaller loans for Christmas gifts might encounter higher APRs, potentially making the loan considerably more expensive. Additionally, smaller loans often come with penalties or fees for non-repayment, further amplifying the financial burden on borrowers.

Petr Jermář from the Banky.cz portal highlights a common tactic used by some loan companies—offering interest-free loans while charging fees instead. Identifying a genuinely interest-free loan involves scrutinizing the APR, which should be at 0%. However, Jermář advises that borrowers also need to be wary of potential penalties reflected in the loan price, such as interest on arrears, charges for early repayment, or extraordinary installment fees.

Jermář issues a crucial caution regarding “free” loans, emphasizing the importance of understanding the repayment period stipulated in the contract. Some loans set a brief repayment window, ranging from fourteen days to a month. Exceeding this timeframe can trigger penalties, transforming what seemed like a manageable loan into a significant debt.

In conclusion, while the allure of a small loan for Christmas expenses may initially appear manageable and friendly, the reality is that high interest rates and substantial fees for non-payment pose considerable financial risks, turning what seems like a festive boost into a potential financial burden. Borrowers are urged to exercise caution and thoroughly understand the terms and implications before committing to Christmas loans.

Article by Prague Forum