200 euros here, a deferred payment there, plus a purchase on account and a tolerated overdraft. Every single decision seems small. Taken together, however, they can quickly turn into a spiral of debt. This is precisely where the new law on consumer credit agreements is intended to step in, which the German Bundestag passed yesterday, Friday.
The background is the implementation of the EU Directive 2023/2225 on consumer credit agreements, and thus an intervention in a market that has changed significantly in recent years: digital credit offers, installment purchases, buy now pay later models, and algorithmic credit checks have made consumer loans easier, faster, and often more invisible. This is attractive for providers, but often risky for consumers.
The new law tightens the reins in several places at once: More forms of credit will in future fall under consumer protection law. Providers will have to examine more closely whether granting a loan is sustainable at all. In addition, excessively high interest rates will come under greater scrutiny, and automated creditworthiness decisions will also be regulated more strictly.
What it is specifically about
In the future, significantly more forms of credit will be included in the rules for consumer loans. These include small loans with an amount of less than 200 euros, interest-free and fee-free loans, loans with short terms of up to three months, and typical buy now pay later models, such as those offered by Klarna or PayPal.
This is exactly one of the most important points of the new law. In everyday life, such offers often do not appear to be loans. They present themselves as a convenient payment deferral or as a small additional option when shopping online. Economically, however, they are often nothing more than consumption brought forward on credit.
In doing so, the legislator is responding to a development that has long since become reality. Overindebtedness rarely begins with a large loan. It often grows through many small obligations, each of which looks harmless on its own.
Buy now pay later loses its special status
The law is particularly relevant for buy now pay later offers. These models have recently become widespread because they simplify purchases and lower inhibition thresholds. From a consumer protection perspective, that is precisely the problem. When payment is separated from the moment of purchase, consumption feels cheaper than it actually is. Several small deferred payments running in parallel often seem harmless, but they can quickly become confusing. The new law therefore treats such models more strongly as what they are in many cases: loans with a real risk of debt.
Creditworthiness assessment becomes stricter
A second core point is the stricter creditworthiness assessment. In the future, providers are expected to examine more closely whether a consumer will likely be able to repay the loan. Relevant and reliable information on income, expenses, and the overall financial situation is intended to be decisive, and this will also have to be requested additionally. This is important because, in recent years, lending has often been optimized more for closing speed than for affordability. That may be efficient for the market, but it is dangerous for consumers.
In addition, certain sensitive data may not be used for general consumer loans. Data from social networks or information on political views should also not be allowed to influence the creditworthiness assessment. This is a sensible protection, especially with regard to scoring and profiling. SCHUFA only recently published its new scoring model.
Anyone applying for a loan today is often evaluated not by a person, but by an algorithm. That is exactly why the new rules for automated decisions are relevant. Consumers are to be given more rights when credit assessments have been automated. This primarily includes the ability to request a human review, which creates understandable rights of control.
Overdraft facilities and excessively high interest rates come into sharper focus
Overdraft facilities are also being tightened up. In future, consumers are to be informed regularly about the status and the costs. If an overdraft facility is terminated or reduced, stricter information obligations apply. Particularly relevant is a planned facilitation for the repayment path. If a used overdraft facility is terminated, before enforcement action a repayment in twelve equal monthly installments is to be offered, without additional costs and at the previous borrowing rate.
Also noteworthy is the planned clarification regarding usurious excessively high loan interest rates. A conspicuous disproportion is generally to be deemed to exist if the annual percentage rate exceeds the market-standard interest rate by 100% or by twelve percentage points. This creates more clarity and makes it easier for consumers to recognize when a particularly expensive loan model is being offered.
Digital conclusion becomes easier, counseling more strongly integrated
What was politically controversial above all was that, for general consumer loans, text form would in future be sufficient instead of written form, and this has now become the greatest weakness of the law. This makes it easier to conclude loans digitally. That may fit the digital present, but on the other hand it also lowers the barrier to concluding a contract, and that is actually a problem with loans, because a loan is not a streaming subscription. The faster and more casually a contract can be concluded, the greater the risk of hasty decisions.
In return, debt counseling services are to be integrated more strongly in the future. Consumers with financial difficulties are to be directed more easily to suitable counseling services from now on.
Conclusion
For consumers, legislative changes are fundamentally positive. Small and digital forms of credit are being taken more seriously. Providers must examine more carefully, provide better information and explanation, and offer orderly solutions in crisis cases. However, the law does not change one basic principle: even a small payment deferral is not harmless convenience, but an advance shifting of purchasing power, which makes any form of credit a dangerous model.
All in all, however, the new law is moving in the right direction. It responds to a credit market in which debt often no longer arises through the classic bank loan, but through installment purchases, deferred payments, overdrafts, and digital mini-loans. What is particularly good is that small loans and buy now pay later models are now being regulated more strictly and that creditworthiness assessment, scoring, and debt counseling are being given greater weight.
What remains critical, however, is that concluding loans is set to become even easier digitally in the future.
