Illegal Microloan Companies Destroying Credit Ratings

Kveikur, an investigative news show from Icelandic public broadcasting service RÚV, recently did an in-depth report on microloan companies operating in Iceland. These are companies who advance quick, small-sum loans in the tens of thousands, usually with an exorbitant compound interest rate attached. If these debts are not paid off fast, they can quickly balloon up into krónur amounts that the typical microloan borrower is unlikely to be able to pay back.

In the course of the investigation, reporters discovered that these companies are actually operating illegally; their terms of service and interest rates exceed maximums established by Icelandic law, which is why they are usually based in Denmark, where the practice is still legal. However, putting an end to the business—and the debts they incur—has been proving to be no simple matter.

Take me to court, I dare you

The compound interest rates are extraordinary. By Kveikur’s calculations, these rates can quickly inflate the money owed to a microloan company by as much as 3,500%. Apart from the cost, there is also the question of what it does to a person’s credit rating; being behind on these payments can put a person on a credit rating blacklist, thereby barring one from being able to take out a loan of any kind, even overdrafts as low as 5,000 ISK.

Hákon Stefánsson, of Credit Info, Iceland’s premiere credit rating company, told reporters that in his estimation, the simplest way to stop these companies would be to contest the debt in court. As these companies are operating illegally, he reasoned, it is highly unlikely that any of them would attempt to collect on their debts through the justice system. He also recommended paying only the principle (the size of the initial loan) and ignoring the rest of the debt.

Paying off an illegal debt

However, Breki Karlsson, the director of the consumer advocacy group Neytendasamtökin, pointed out the obvious: if these microloans are in fact illegal, what are they doing on anyone’s credit rating in the first place? The group has communicated directly with Credit Info on the matter.

“We have demanded that Credit Info change their operational directives and strike down this reverse burden of proof,” he told reporters. “That is to say, the company should have to prove that these debts are in good legal standing; not that an individual needs to prove they’re illegal.”