The Price of Consumer Debt

Credit is a difficult issue in Latin America. Credit card APR interest regularly runs at 30-50 percent, upwards of five times what it is in North America. Bank loans are not a lot cheaper. Yet more than ever  Brazilian consumers are borrowing and financial institutions are encouraging them to do so.

When I recently opened up an account at Itaú, Brazil’s biggest private sector bank, I was surprised to see that the checking account automatically included a 500R line of credit on the account (equal to about one month’s minimum wage), with an interest rate of 138 percent per annum. So if I have no money in my account and start dipping into this line of credit, I will be paying close to 12 percent interest per month on my debt. These sorts of interest rates can only be qualified as usurious.

The combination of Brazil’s lofty real interest rates (among the highest in the world), the priciness of imports (due to tariffs), economic optimism among Brazilians, rising inflation, the global surge in the price of food stuffs, and the increasing availability of credit, it is no wonder that the Folha de São Paulo recently reported that debtor defaults were up by 25 percent in January, 2011– the highest level since 2002. What are the consequences? The poor and uneducated get hit hardest, and higher defaults inevitably raise the cost of capital (and debts) even further. Is it time for greater regulatory control?

3 Comments

  • Hey, don’t feel alone. CitiBank charges 19% interest, compounded! Usury seems not to be a problem for financial interests anymore, and it is just plain wrong.
    Now days, banks make most of their money from fees and outrageous interest than they do on traditional banking loans and it is just wrong.

  • Maybe increased competition among financial institutions is more of an answer to lower the high bank interest spread than more regulation.

    Brazil already has much better regulation of its financial institutions than, say, the United States. We also have much better government oversight.

    But it’s still much cumbersome to take your money to another bank here, and most people buy they financial services (including credit cards) in the same bank they have their checking account (we don’t collect credit cards here, most people usually have only one or two, if any).

    And up until a few months ago, even the checkouts of retail stores had to have a credit card machine for each of the credit card companies (Visa, MasterCard, and American Express, mostly).

  • Greg, this article came out last month and is along the same lines.
    The Auto Loan and Auto industry here is CRAZY! Loan rates down to 22% in 2010 from 36% 2008 and car financing up 45 percent in Brazil last year. The US interest rate is about 7% to 4.7%. Also the sticker price of cars are realistically 3 times more expensive, new or used and it doesn’t matter if the car is an import or domestic.

    http://www.bloomberg.com/news/2011-01-18/auto-loan-bubble-concerns-spurring-regulator-restrictions-brazil-credit.html.
    – Bloomberg
    Vehicle financing surged 45 percent in Brazil last year compared with an 11 percent increase in the US, helping fuel the fastest economic growth in more …

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