Over the past 4-5 years, the word refinansiering (translation – refinancing) has become an ubiquitous term within the North European banking industry.
It refers to the practice of refinancing old consumer debt, by bundling several loans into one single portfolio. Through the issuance of new debt, old loans are wiped out in favor of lower interest rates.
A new concept
Refinansiering became popularized in the wake of the explosive increases in consumer loan debt, witnessed in Northern Europe. Over the past 4-5 years, the region’s consumer debt has reached staggering levels, with annual growth levels topping 15% in some periods.
As many experts had foreseen, a significant portion of the consumers were unable to repay their loans under the existing terms. High default rates then prompted banks to introduce new credit products, aimed at customers in economic distress.
A downwards spiral
High consumer debt is known for its adverse financial effects, making it easier to get trapped in a downward spiral, where interest charges surpass monthly payments. Naturally, many individuals got stuck in an endless debt cycle, with few available venues to seek redress.
Moreover, Scandinavian nations are known for their strict credit policies. Among the most notorious systems can be found in Norway. High fees, coupled with aggressive policies on debt collection, and few customer protections makes it close to impossible to avoid creditors.
A Norwegian debtor may only file for personal bankruptcy once. No second chances are given, which in turn has placed a number of Norwegians in an invisible debtor’s prison.
Refinansiering is therefore one of the few means to circumvent the prospect of economic ruin.
Breaking down the process
Consumers ridden by high interest loans typically owe money to several financial institutions. According to refinansiere.net, an average customer applying for refinancing winds up paying an APR of roughly 25%. After completing the refinansiering process, rates dwindle to around 12% (on average).
The end goal is to pool together as many small loans as possible, before wiping them out in favor of a new credit package. Thus, the consumer ends up owing money to 1 bank, instead of multiple financial entities.
Important caveats
Scandinavian nations have implemented a warning system among creditors, in which a notice gets posted in a centralized register whenever someone defaults on their debts.
As an example, such notices are known as betalingsanmerkning in Norway, and it effectively bars a consumer from applying for a new line of credit (including refinancing). In theory the system works as it should, but the adverse effects are palpable.
Once excluded from new credit lines, a debtor can only rely on family and friends to help alleviate the problem. As an alternative they can tap into their mortgage loans, by offering their homes as collateral.
Over the past 3-4 years, a number of new specialist banks have surfaced in northern Europe, targeting this particular group of debtors. They offer unconventional credit packages, tailored to those who can’t meet their financial obligations. One such bank is BlueStep, which offers refinanced mortgages at an average rate of 6,68%.
Despite having significant additional costs, numerous consumers have turned to these banks for help.
Soaring debt levels
Over the past decade, Northern Europan nations have been plagued by soaring debt levels, which in large part can be tied to the real estate markets.
Both Sweden and Norway (and Denmark to a lesser degree) have witnessed their real estate prices spike to historically high levels. Many larger cities have seen their prices spike up by more than 75%, over the last decade.
Inflated real estate prices have in turn offered consumers more leverage and access to non-collateralized credit lines. Although unsecured loans make up a tiny portion of the total debt, they eat up almost x 5 as much in interest expenditure.
An article published by the Norwegian newspaper RB.no reports that debt tied to Norwegian consumer loans (known as forbrukslån) has surpassed 12 billion USD. This is significant for a country whose population roughly mirrors that of Minnesota. For that reason, the need for refinansiering is unlikely to dissipate in the coming years.
