Are people who take out 90% loans stupid?

While the title may seem a bit harsh, this is the reality of what many people think – if you take out a high interest loan then there are very few reasons to do so, the top one being that the person taking out the loan is just plain stupid. Is that the case though, or is that always the case? If so, why are 90% loans even legal?

Maximum interest rates by law

Estonia is currently in the process of regulating maximum interest rates for loans. As it stands, the maximum is to be set at 3x average consumer credit rate, which makes the cap out to be at just about 90% interest. For any investor, 90% returns would be in the realm of magic, which is why such an interest rate for loans raises a lot of questions, why would anyone take out a loan with such an interest rate?

Loan eligibility

The answer to the question of why anyone would take out such a loan is easy – they aren’t eligible for any other loans. It seems some people (often investors) forget, that the majority of the population isn’t as well off as they are. Whether or not you’re credit worthy depends on many different aspects, and once you fail too many criteria it’s easy to see the interest rates climbing.

Having a low paying (or minimum wage) job, living outside of the capital, having multiple children, not having enough education etc. are all warning signs for creditors that increase your risk levels exponentially. While most people who have their finances in order can easily enjoy the chance to take out 9-12% consumer credit loans when necessary they are definitely a minority in the population.

This is one of the reasons why I’m in favour of capping interests, but against outlawing things like SMS loans for example. In Estonia, SMS loan has more than 100 000 customers! They are clearly offering a service that people need (and I agree that it’s super sad how many people need the service!). However, if we ban the service, what will people do? Steal? Get illegal loans from someone? While we can and should educate people, just cutting people off from money when they need it is not a good plan in the long run.

How bad are 90% loans?

Many people (rightly so!) believe that 90% loans are super expensive in terms of interest paid in the long run. The problem being, most people don’t really assess their loans in terms of the ratio of interest vs principal but they look at the monthly total payment. If they can afford the monthly payment then everything is OK, despite the fact that the interest rate might be insane.


I made a chart that shows monthly payback sums for a 1000€ loan with various interest rates for 1 year and 3 years. While you can see the totals climbing at an alarming rate, you don’t see the steep growth for monthly payments – every 10% of extra interest only increases the payment by about 5-6 euros. That’s not enough to make people really consider not taking out the loans.

How to fix this?

As boring as the solution is, then more financial education is the way here. How effective that would be, is however, questionable. The high interest loans are theoretically OK as long as people are capable of making the payments.

The problems arise when people miss payments, and the interest and penalties start stacking up at an alarming rate, causing the situation where the interest owed is multiples of the original principal payment. That’s when we have a problem that has caused tens of thousands of Estonians to default on loans and the law has failed to protect them from their “stupidity”.

However, it’s not just stupidity that’s making people take out high interest loans – it’s lack of financial awareness, its difficult financial situations and a lack of emergency funds and living from pay-day to pay-day, all of those not as easy to change as we’d wish them to be.

14 thoughts on “Are people who take out 90% loans stupid?

  1. Good post Kristi!
    I would add that in Estonia the penalties for missing a payment are comparatively low for private persons (the maximum daily penalty rate is calculated as the yearly rate of the contract divided by 360) and with new regulations also other fines are heavily curbed (e.g. it is not allowed to charge 50 euros for a missed payment notice letter).
    Also, the maximum rate currently is 80%, as the Bank of Estonia has published the average consumer credit rate on July 1st, it stands at 26.57%.

    New laws have also been passed that require all credit providers to get an operating license from the FSA, which should clean up the market to some degree as random people with a bit of capital can’t just start giving out credit willy-nilly.

    1. Cool, I saw the 90% number somewhere, so that’s that remained in my head.

      You example of the 50€ letter for payment notices is just the example of when the law needs to protect people from both themselves and loan sharks – since most people aren’t aware enough of their rights and don’t have the money to go do court to argue against insane fees.

      I’m looking forward to seeing the impact of the new licensing system though, are you aware if there will be any data on the number of credit provides currently vs after the regulation has come into effect?

      1. Sorry for the late reply, I did subscribe to replies to this thread but didn’t get any notifications. While we’re on the subject, for some reason I don’t get notifications about your new posts either for some reason.

        Anyway, data about the current number of credit providers simply does not exist, which is one of the reasons the new laws are introduced in the first place. In the future the FSA will most likely publish statistics for the credit providers they supervise.

  2. Hello,

    Thank you for your post.
    Personally I am against allowing to be a loan shark, the legislation should ban too high interest loans. It will not solve the problem of stealing – rather accumulate it. Once person is defaulted with high interest loan, (s)he has most likely no better situation than (s)he had prior taking the loans. Quite the opposite. Therefore loan sharks might actually worsen the criminal activities.

    Bear in mind also, the education is not the key to financial success. It is a key for a job and being a better payslave but definetely not the key to be a rich person.
    If you visit New York in the diamond streets you will notice there are some pretty succesful diamond dealers from Middle Eastern background and they are not that well educated – some even barely speak English(!!!).
    In some extent education brings some basic level of income that you are able to pay your bills in time but definetely not make one rich. Personally I do not know any person who made it to be rich thanks to working.
    If you browse through the Forbes 500 list, the rich people are investors or entrepreneurs. Both you can be without a formal education. It only requires some common sense, plan and some disciplineship.

    I know I will get some stones on my head after speaking all this to a teacher but to calm down a little I acknowledge the fact that schools are teaching some good stuff also, such as reading, writing, algebra, languages etc which might help you to achieve your goals but certainly will not guarantee the achievement.

    Sorry for slight off topicness also.

    1. I completely agree that academic education is in no way a replacement for good business sense and an entrepreneurial spirit. However, for those people who live an ordinary life, academic education has the obligation to teach them the basics of how to manage well in society and their everyday life, which is somewhat problematic since for example financial knowledge isn’t taught everywhere and with nowhere enough depth.

    2. Hi Jarmo,

      As Kristi also mentioned already, academic education is not the only education that exists in the world. When i learn something by myself (for example how to do trades on stock market), then this is also education… but not the academic one.

      In addition, being able to calculate numbers is also a valuable trait, even if you are not going to be a “payslave”. So i would not be so harsh to education system… at least not in Estonia. True, the more time you spend in school, the more useless (as self learning becomes more efficient and academic education less efficient over time) the school system becomes.

  3. Thanks for the great post, Kristi!

    I do agree with most of the things you have written. At the same time, i believe, Mr. Darwin should also express himself somehow in our society, where we can heal almost everybody, who just century or two ago would have been considered dead. In today’s technologically advanced time, we don’t have such problems and so, Mr. Darwin doesn’t have too much room to do his work… this leads to bad outcomes (people being worse of than their predecessors), as the better ones are not favored.

    In capitalism, i do believe that ability to be wealthy is part of the “survival of the fittest”. And so, i would not restrict the market any way, let people decide by themselves what to do, and when they do bad choices, let the Mr. Darwin do his job. Question is, how do you remove that person from society, if (s)he should be considered “dead”? (financially) Maybe harsh, but because of lack of resources, let them actually die? By logic, it wouldn’t be so bad. But it feels terrible.

    In the end, stupidity should be taxed and through stupid choices you are paying that “tax”.

    1. Since at heart I’m somewhat of a futurist, my solution to Mr Darwin’s problem wouldn’t be to remove the people from society (through death or other means), but a guaranteed minimum income & chance at meaningful work, which would do several things – firstly lessen tax strain on workers and make society in general safer (since a subgroup of people who don’t have money or the ability to manage it will resort to crime, and if we can keep them from it, we’d all be safer.)

      1. Mr. Darwin works by eliminating the less fit ones and favoring the fittest. If you keep everybody alive with “guaranteed minimum income” (citizen’s salary!?), the society will go down… unless we have figured out engineering people (genetics) before it’s already too late.

        Isn’t your idea more like communism? Everybody works, everybody can leave, eventually money is not needed? It would work perfectly with robots, but because people are flawed, communism just isn’t going to work with humans.

        1. The idea of guaranteed minimum income is somewhat different from communism in the sense that you don’t just give money to everyone, people have to contribute to society to be eligible for the benefits and the income is low enough that people will manage, but it won’t be a luxurious life.
          I recommend reading more about it, it was recently on vote in Switzerland for example. The problem in the long run is – technology will overtake so many places of labour, that people who do simple manual labor won’t have anything to do. Not all of those people will be capable of learning/performing at a level required to manage high tech equipment for example. What do we do with those people? There will be millions, and there won’t be enough jobs. Unless we want a sci-fi future where we have an upper class and a lower class that essentially lives in infinite poverty with no means of doing better other than through violence and rioting, giving people a chance at a dignified life doesn’t seem like a bad choice :)


          1. Transition to jobless world, where nobody has to work is definitely harsh. And the truth is, there’s really nothing you can do about it.

            I have researched about this minimum income thing and i don’t believe it’s a good idea. Giving out any resources to anyone without them being responsible for actually earning that, is a bad idea. Throughout the millions of years of evolution, what idea has led us forward? Being as efficient as possible. Now, if you would have “minimum salary” that allows you to live, what strategy would be most efficient to live? Not work at all. Simple as that. People search for efficiency as we have done already for millions of years. (Starting from time when we all were one-cell organisms)

            But about people, who are incapable of learning (to handle tech), where do you give Darwin a chance to improve humanity, if you don’t let them to be the end point of their “flawed branch in the tree of life”? How do you see the humanity will evolve in future, if we keep everybody alive? What creates progress in ourselves?

            1. The problem here being – in the end someone is going to have to start making the call on the topic of who is “useful” and who isn’t. Who would you trust to do that? The government? The “people”?
              This is all fun as a theoretical intellectual discussion in terms of who is useful for society but when it comes down to it, your solution ends up in making life and death decisions, which I’d rather not give anyone right over.

              1. Exactly. And exactly because of that reason i would let everyone to decide fully by themselves, how to live and if they are unsuccessful in our current world, then this is the “deciding force”. Today it would mean roughly: Remove all social benefits (to not keep unsuccessful existing in the society), because of the before mentioned lower taxes a lot (let everyone decide exactly, what they do with their resources) and then let the “financial natural selection” do the work. To do thing even more fair, also remove all kinds of subsidies to make the market as free and self regulating as possible. (All subsidies and other things as such are really an anomaly in free market) In the end you would have a society where everybody would work on something useful (because otherwise there would be no buyer for your service) and the one who isn’t capable of doing anything useful… well, i’m sorry for you.

                Feelings do keep us doing what i just described, but to be honest – feelings are irrational and so, to create a truly futuristic, efficient, fast growing and evolving society, you need to be rational and let the nature (which the free market by itself will become) do its work. There will be no “someone” who decides, but the whole society decides together that this particular person doesn’t have anything useful to offer to anyone. In that sense, there is no problem.

                The real question in this topic as i see is: do we understand the same way, what is “useful”? For me, it means, for that product/service there is a need. If there’s no need for that, its not useful. How would you define “useful”?

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