Debt, Credit and Credit Institutions

Very often, achieving your financial goals – buying a new car, apartment renovation or something else – requires available funds that you do not currently have. In such cases, there are generally two options. One is to postpone the realization of your goal for a future period, when you will have accumulated the necessary funds through savings or investments. However, this is not always the best solution. For example, you need a home for your family now, and not in 30 years, when the children will have taken their own path. Or your goal is to improve your qualifications (through courses, a further educational degree, etc.), which will help you increase your income. The other option is to provide the funds you currently need by taking out a loan, which you will repay through part of your future income.

 

What does it mean to be in debt?

Indebtedness is an existing financial obligation, in which a certain amount of money must be returned to the person who provided it, under agreed terms. The obligation can arise in various forms - taking out a loan from a bank or financial institution; purchasing goods and services on installments; borrowing from a friend or relative. Taking a loan from a relative may be only by virtue of an oral agreement and without paying a price for the borrowed funds, but when taking out a loan from a bank or financial institution, it is different.

 

What is a loan?

A loan is a financial instrument through which an institution (creditor) provides a natural or legal person (borrower) with funds for a certain price - interest. The relations between the two parties are regulated by a written contract, including all the terms of the loan - total amount due, interest rate, fees, term, repayment method, etc.

A wide range of credit products is available on the market – consumer loans, mortgages and home loans, overdrafts, revolving loans, leasing, student loans, etc. (for more information see articles "Consumer loans", "Other consumer loans" and "Mortgage loans"). The great variety reflects the different life situations in which the need for borrowing arises. The most common are:

• Major purchases: The purchase of a primary residence, investment property or car often requires the use of a loan, since their acquisition is associated with available funds in an amount that people usually do not have. In these cases, mortgages, consumer loans and leasing are mainly used.

• Home repairs or improvements: The funds are most often granted under consumer loans and are used for renovation, expansion or energy efficiency of the home.

• Financing education: Many people use loans to invest in their own education or that of their children. Student loans and consumer loans help cover the costs of education.

• Covering unforeseen expenses: They arise in a number of circumstances - health problems, car repairs, unbearable utility bills, etc. In the absence of savings, consumers most often use the so-called "fast" loans.

• Purchasing household and other equipment: If you are unwilling or unable to use your own funds, people can buy them on installments through the so-called commodity loan.

• Covering everyday expenses and purchases: In addition to your own funds, there is the possibility of using an overdraft loan, usually provided on debit cards or credit cards, which are based on the so-called revolving credit.

• Starting or expanding a business: Although there are loans for small and medium-sized businesses, which are a separate category, some people choose to finance their own businesses through consumer loans, especially if they do not have access to specialized business loans.

The credit can be a useful tool for achieving your life goals, provided that you use it wisely and with a clear understanding of the responsibilities you assume with it. Careful planning, realistic assessment of the ability to service the loan, and prudent management of the disposable income are key to the successful use of the credit.

 

Which institutions can provide loans?

Lending activity in Bulgaria is strictly regulated and fully compliant with European legislation. The right to carry it out is granted to institutions that meet certain legal requirements. In our country, the most widely used are credit products and services offered by banks and financial institutions. Their activities are regulated by the Credit Institutions Act (CIA), the Consumer Credit Act, the Consumer Credits Related to Immovable Property Act and other regulatory acts.

Banks operating in Bulgaria – established here or operating as branches of foreign banks – have a license from the Bulgarian National Bank (BNB). In the event that a given credit institution is licensed in a country of the European Economic Area, it can carry out its activities by submitting a notification to the BNB for the free provision of services, in accordance with the mutual recognition of the single European passport. When choosing a credit institution, it is wise to check whether it is included in the BNB Register of licensed banks and foreign banks’ branches in the Republic of Bulgaria, especially if it is not among the popular banks. In addition to lending, banks raise funds from depositors and offer a wide range of payment services and products. Their activities are subject to strict legal requirements, including minimum capital, risk management, liquidity, and others.

Financial institutions that provide loans (within the meaning of the CIA) have a diverse profile - companies providing the so-called "quick loans", financial leasing companies, microfinance organizations. In order to carry out their activities, they are subject to registration and entry in the BNB Financial Institutions Register under Art.3a of LCI. Financial institutions are subject to control.

 

Regulation and supervision of banks

The BNB is the body that regulates and supervises the activities of banks, i.e. of credit institutions in our country. This is one of its main functions, which aims to maintain the stability of the banking system and protect the interests of depositors. Through the licensing regime, the central bank controls access to the banking system and admits only credit institutions that meet legal requirements and regulatory standards. The BNB supervises the activities of banks by monitoring and analyzing a number of indicators - capital adequacy, capital buffers, asset quality, liquidity. Information about the banking system and credit institutions is regularly published on the BNB website.

Since 2020, by virtue of the close cooperation between the European Central Bank (ECB) and the BNB within the framework of the Single Supervisory Mechanism, as well as Bulgaria's participation in the EU Banking Union, the ECB has also powers to supervise credit institutions in our country. After Bulgaria's membership in the Eurozone, it will continue to be part of the EU Banking Union by virtue of the Single Supervisory Mechanism Regulation.

Another institution which is relevant to the activities of credit institutions is the Commission for Consumer Protection (CCP). It carries out control over unfair commercial practices, removal of unfair clauses in the general terms and conditions of consumer contracts and distance sales. Consumers can file complaints with the CCP regarding a dispute with a bank or financial institution and take advantage of the possibility of out-of-court dispute resolution through the conciliation commissions operating under the CCP. (for more information see articles from the Consumer Protection section.

 

Useful links:

Bulgarian National Bank

BNB Register of Financial Institutions

Consumer Protection Commission

Conciliation Commissions at the Consumer Protection Commission

Credit Institutions Act

Consumer Credit Act

Consumer Credits Related to Immovable Property Act