Supreme Court records show that there were 64,637 filings for personal bankruptcy in 2016, an increase of 781 cases over 2015, thus marking the first increase in 13 years.
The number of personal bankruptcies peaked in 2003 at almost 250,000 nationwide. The reason for the subsequent decrease was greater scrutiny of consumer loan companies that resulted in revisions to the lending law, which went into effect in 2006. These revisions limited how much money a person could borrow from consumer loan companies.
Prior to the revision, a person could borrow as much as he wanted and the loan company could charge high interest rates. Borrowers often ended up taking out additional loans to pay off previous loans, thus engendering a vicious cycle of borrowing.
One of the revisions limited the amount a person could borrow to one-third their annual income and another placed a cap on interest at 20 percent annually. Before the revision, the cap was slightly more than 29 percent.
The changes obviously had the desired effect since the number of personal bankruptcies declined by as much as 30 percent in a single year, so what caused this recent uptick?
In an article in the Feb. 11 edition of Tokyo Shimbun, a notary blames the increase on the increased prevalence of so-called card loans, which are basically the same as consumer loans in terms of how easy they are to apply for and approve.
However, card loans are provided by banks, which are not subject to the lending law revisions. Since 2006, banks have put more effort into promoting card loans — also called user loans — in order to attract people who previously patronized consumer loan companies and still need quick infusions of cash.
There is no limit to the amount a person can borrow through a card loan, and the notary, who often helps people solve consumer debt problems, thinks that the popularity of card loans is behind the increase in personal bankruptcies.
At the end of 2016, the outstanding balance for all personal loans in Japan was ¥5.44 trillion, the largest amount in 18 years.
The Japanese Federation of Bar Associations says that even though the revisions were implemented in 2006, it wasn’t until 2010 that their effects started to be fully felt. In that year there was a noticeable shift of borrowers moving from consumer loan companies to banks in order to take out personal loans.
It should be noted that in the intervening years, many consumer loan companies had gone bankrupt themselves and were purchased or otherwise taken over by banks. In 2015, the debt balance for bank card loans was ¥4.6 trillion, outpacing the debt balance for consumer loans for the first time ever.
Traditionally, banks made money on loans to small businesses and families buying homes, but as interest rates approached zero and then went into minus territory they weren’t making much money even when people did take out loans. Interest rates for card loans typically range from 3 percent to 15 percent, depending on the amount borrowed and the time period for repayment. Before the revisions, users of card loans also tended to have higher incomes than people who patronized consumer loan services. That’s one of the reasons, according to the Japanese Federation of Bar Associations, that the government hasn’t regulated card loans the way they regulate consumer loans.
On average, prior to the revisions, card loan users didn’t borrow as much as consumer loan users did. Nevertheless, the Japanese Federation of Bar Associations, following its own investigation into card loan practices, is recommending that the Financial Services Agency look carefully at specific banks to see whether or not they are misleading customers in their advertising, which mimics consumer loan pitches in portraying the process as being easy and painless.
The Japanese Federation of Bar Associations believes that the same vicious cycle is bound to start, but now in the banking sector. On Dec. 19, Asahi Shimbun reported that several banks may be in violation of the lending law, for doing things like lending large amounts of money to people who are unemployed and have no savings or guarantors. The Japanese Federation of Bar Associations is recommending that the Financial Services Agency set up a new organization to supervise the card loan system specifically.
Perhaps the most appealing aspect of card loans, which was also the main appeal of consumer loans, is that the applicant doesn’t even have to talk to a loan officer. They can apply in person, but most apply online or through ATMs where borrowers withdraw their loans in cash.
The only real requirement for a card loan is that applicants have an account with the lending bank. No collateral or guarantors are needed, and while applicants are supposed to have income, some banks do not require proof. Seven Bank, for example, requires no proof of income for loans of up to ¥3 million, and openly solicits homemakers, students and part-time workers.
In many cases, the loan is approved very quickly and, once it’s approved, the borrower just uses their bank card to withdraw money on their account whenever they want. It’s like using a credit card, and payments are made in a revolving style. Repayments for, say, a ¥100,000 loan start at about ¥2,000 a month, with interest included.
Some banks attract customers with ads that say they will not charge interest if the loan is paid back within 30 days, although if you read the small print there may be other conditions involved.
Different banks charge different interest rates, with the so-called megabanks charging a bit more and net banks charging a bit less, since they have much less overhead. The higher the amount borrowed, the lower the interest rate, and while, by law, there is no limit to the amount that can be borrowed from a bank, all banks do set an upper cap on card loans. Mizuho’s is one of the highest at ¥10 million. Any loan of more than ¥8 million at Mizuho is charged 4 percent interest. Anything less than ¥1 million is charged 14 percent. Sony’s web bank charges between 2.5 percent and 13.8 percent. Also, some banks will discount the card loan interest if the borrower also has a housing loan with the institution, usually by about 0.5 percentage points.
At any time the bank can increase the repayment amounts, and if there are no funds in a customer’s account when the bank attempts to withdraw its monthly payment the typical delinquency charge is 20 percent. Some banks, such as Tsuruga, allow borrowers to pay more in monthly payments if they wish, but many don’t, or, at least, require pre-approval to do so. Obviously, the longer it takes to pay off a loan, the more money the bank makes.
When consumer loans were underregulated, they were mainly pitched at workers with unstable incomes and dodgy or nonexistent credit histories.
Nowadays, the average single Japanese person in their 20s has about ¥2 million in savings, but 36.4 percent of people in their 20s have no savings at all and, if they live alone, the portion goes up to 39 percent. This is essentially the target customer for card loans, and the Japanese Federation of Bar Associations thinks that once young people get hooked on easy financing, they will end up falling into an endless loop of debt.
Yen for Living covers issues related to making, spending and saving money in Japan on the second and fourth Sundays of the month.