Getting Paid to Run Up Debt

Geldregen über Frankfurt am Main
Some banks are practically throwing it away. Source: DPA

Once upon a time, it was clear: borrowing cost money. But now Smava, a Berlin-based fintech, has broken new ground by offering loans at a negative rate of interest. In other words, paying consumers to borrow. “Anyone borrowing €1,000 ($1150) will only pay back €994,” says Smava boss Alexander Artopé. That translates to a cool -0.4 percent.

For your average consumer, the offer is a novelty. But negative interest rates have become a sad fact of life for governments and businesses. In June 2014, the European Central Bank cut its main deposit rate to below zero; it now stands at -0.4 percent. The decline in rates hit businesses hard, while savers had their first experience of “penalty interest rates.” For the German government, this was good news. Rates on its shorter-term bonds are still in negative territory, saving billions of euros in interest repayments on government debt. The unthinkable is now the norm: Investors are paying to lend the state money.

However, so far negative lending and borrowing rates for regular retail customers are a rarity. A German agricultural bank had a short-lived scheme to pay borrowers bonuses greater than the cost of interest, and there have been a few isolated cases in Denmark, Belgium and the Netherlands.

“Pure marketing.”

Nils Niehauser, consumer protection adviser, on Smava's negative-rate loans

Consumer portal Verivox surveyed 255 financial institutions for Handelsblatt to assess terms and conditions for borrowers. The results showed most borrowers, in fact, still pay interest. These rates continue to soften, but the average three-year consumer loan of €10,000 still costs an average 4.88 percent per year – not even close to zero.

Smava, by contrast, is giving away money with its loans. Unsurprisingly, there’s a catch: The largest amount a Smava consumer can borrow at these enviable terms is €1,000, and each person is restricted to a single loan. Under this get-rich-scheme, the net benefit of the transaction adds up to… €6 per customer. In Germany, Smava isn’t the only one to pull creative publicity stunts. The Munich-based Fidor Bank lets customers apply for a loan via Facebook but, as the bank emphasizes, only clients with a good credit history will qualify. “It’s not a fake offer,” a speaker for the bank said.

“People have to figure out for themselves if it is worth signing a loan contract for the sake of six euros,” said Nils Nauhauser, a department head at the consumer protection office in the German state of Baden-Württemberg. He described the Smava deal as “pure marketing.”

For Smava, the offer will likely serve its purpose: To prompt more customers to register with its online credit portal. As every webmaster knows, users who register usually come back. At the very least, they can be targeted with direct mail. Smava was set up as a peer-to-peer lending site in 2007, but as since reinvented itself as a loan comparison site, connecting borrowers with commercial lenders. “With our negative interest rates, we want to encourage people to compare rates online,” said Mr. Artopé. That should pay off for the online loan platform, if only marginally for consumers.

Mr. Nauhauser points out another catch. Customers who receive a transfer to their bank account may end up paying a fee greater than the bait. Ironically, banks have been raising their fees because negative interest rates have eaten into their traditional income streams.

Michael Brächer is a financial editor on the investment team in Frankfurt. To contact the author:

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