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Between January 2016 and December 2018, the average rate for an unsecured personal loan was 111.2% per year. To arrive at this percentage, the calculation considered the monthly average for the period. In this same modality, but with a guarantee, the rate was 30.5% per year. By doing a simple subtraction, we can see a considerable difference of 80.7 percentage points. This reduction in the interest charged from one type of loan to another shows the important role of collateral. By offering a guarantee to the lender, individuals and companies can obtain loans - and financing too - at a significantly lower cost.
The finding was made by the Central Bank of Brazil in the Brazilian Economy Report (REB) 2018 published at the end of last month. The study also showed that the annual interest rate charged on payroll loans and real estate and vehicle loans is also lower because in these cases there is a guarantee for the lender, which is usually a fiduciary alienation, which I will comment on later. On the other hand, in the case of revolving loans, such as credit cards, which do not include guarantees, the annual interest is the highest measured: 271% per year. But what are guarantees and why are they relevant to reducing the interest charged?
Basically, guarantees are assets offered by the borrower to the lender that can be sold in the event of default. If the debt is not paid, the asset is sold by the lender so that it can be repaid. By doing this, as we saw in the BC study, the borrower obtains a loan at lower interest rates and can negotiate better payment conditions, such as a longer term. There are various types of guarantee provided for by law. The real guarantees are mortgage, fiduciary alienation and pledge. Personal guarantees, also known as fidejussórias, are aval and fiança.
The guarantees, as the Central Bank noted, are related to the financial institutions' ability to recover the unpaid debt. They influence the risk of the operation. The easier or less costly this recovery capacity is, the lower the interest applied to the operation contracted by the borrower.
Fiduciary alienation is perhaps the best known of the guarantees. This is because, as I wrote earlier, it is usually used to finance real estate, whose average interest rate was the lowest in the BC study: 9.3% per year. This interest is only possible because fiduciary alienation is an excellent guarantee for the lender. By setting up this guarantee, which takes place by means of a public instrument, ownership of the property is transferred to the creditor.
The debtor, i.e. the person paying the mortgage, only has direct possession of the property for the duration of the debt. Only once the debtor has fulfilled the entire payment obligation does he become the owner of the property. Note that, in the event of default, there is no difficulty for the creditor (since he is the owner of the property) to take over the property pledged by the debtor by means of the appropriate legal measures.
What about those who can't offer collateral to take out credit? For these individuals and companies, the Positive data (CP), whose new model with automatic inclusion will come into force on July 9, is essential. With the CP, they can demonstrate to the market that they are reliable payers and therefore deserve access to credit at fairer interest rates. The Cadastro Positivo is a database that gathers the complete payment history of a consumer or a company, which includes, in addition to unpaid and overdue bills, those that have been honored and are being paid. In this context, credit analysis by the market becomes more comprehensive and therefore much fairer.
The CP will, in fact, be one of the main sources of consultation for the new loan model regulated in Brazil. At the end of April, the complementary law 167/2019, This is the first of a series of projects to be launched by the Brazilian government, which created the Empresa Simples de Crédito (ESC). The aim is to bring individual investors closer to small entrepreneurs who need credit. According to the law, we are talking about individual micro-entrepreneurs, micro-enterprises and small businesses. According to Sebrae, 30% of these entrepreneurs are refused loans by banks, which demonstrates the importance of the ESC, which is not a financial institution and is not regulated by the Central Bank, but can grant loans and financing with or without collateral. Also according to the law, ESCs can only operate with the capital of their partners, who must be natural persons. Its operations must be regional: loans are only authorized to businesses in the same municipality or in neighboring cities.
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By: Elias Sfeir President of ANBC & Member of the Climate Council of the City of São Paulo & Certified Advisor
