Note: This is the English translated version of a blog post originally directed to our growing Brazilian community. If you speak Portuguese, check out our original post.
I’m in debt, what can I do?
My last article described how BTCjam generally works and provided some tips to help you get a loan with us. Now let’s get into more detail about how BTCjam can be a useful tool to help you consolidate your debts at lower interest rates.
This subject is increasingly relevant given that Brazil has some of the highest interest rates in the world. In fact, Brazil currently holds the record for the highest interest on credit cards in the world.
Current interest rates in Brazil
Based on a study conducted by Proteste that included 108 credit cards from 12 financial institutions, a regular Brazilian paid in July 2015 on average an interest rate of 378.76% for their credit card debt. The runner-up in this disastrous ranking is Colombia with 62.51%. In other words, Brazilian credit cards charge more than five times the interest charged in Colombia, and more than nine times the amount charged by the country in third place–Peru.
In Brazil, credit cards charge 14% per month while in the United States it is only 14% per year! With the average American income being five times higher than that of Brazil’s, the disparity in interest rates is shocking.
It’s not just credit card interest that is high in Brazil; overdraft interest is also exorbitant. According to Procon São Paulo, the average interest rate charged by banks on overdraft is reaching 11.49% per month – the highest in 10 years. Even the other kinds of loans, that are usually cheaper exceed the average of 6% per month.
Why are interest rates in Brazil so high?
Several economists have analyzed this question and the answer is not conclusive. There are many elements that make up the interest that is charged to the consumer, but we can summarize them as four main factors: the bank’s profit margin, tax, competition and default.
For those who are curious, I will explain the following:
- Profit margin: Banks, like any business, have shareholders who invest in the company in exchange for a return. Banks seek profit to remunerate such shareholders with dividends.
- Taxes: Governments not only tax the citizens, but also companies. The more banks are taxed, the more interest they charge. The Brazilian government is known to be a bloated machine that finances its expenses by charging high taxes.
- Competition: The five largest Brazilian banks control 80% of the credit. Cases like this where there is low competition do not incentivize price drops (e.g. interest rate drops). Banks are protected by legislation and financial demands that drive away startups seeking innovative solutions to improve services for consumers.
- Default: As a rule, the more defaults, the greater the interest. There is no national credit system in Brazil like in the US, so generally Brazilians pay higher interest rates to cover the defaulters’ failure to pay. This creates a vicious cycle since increasing interest rates generates more defaults, and more defaults create higher interest rates… BTCjam has developed its own credit system so that people pay fair interest rates that are in accordance with their ability to pay. Learn more about how BTCjam works.
The concept of debt consolidation
Raise your hand if you never entered the overdraft! I have definitely overdrafted my bank account in the past. I remember looking at my statement day after day, and to see the growing debt was distressing to say the least (just a note: Brazilian banks charges interest on a daily basis). I clearly remember a trip to Miami where I got carried away with the low prices. I ended up spending more than I could afford and when the bill came around, I could not pay it off so I paid the minimum balance. The following month I had to pay 14% on the debt I procured!
Sometimes an initial debt generates a snowball of people getting another loan to pay the initial one. The result: people end up putting too much of their income towards the repayment installments that follow. To help people get out of this vicious cycle, one of the solutions is to exchange the most expensive debts (those that charge high interest rates) for a cheaper debt (with lower interest rates). This operation is called Debt Consolidation.
Debt consolidation is the solution to paying less interest
Instead of paying 14% per month on a credit card or 10% on overdraft, it can be preferable to borrow at BTCjam where borrowers pay an average of 6% per month!
For example, by consolidating a debt of $5,000 with 14% interest per month in 12 installments to a debt at 6% interest per month could save you $280 per month, or $3,400 in total. Recalling that the original debt was only $5000 (i.e. consolidating your debt) allows you to save 64% on the original debt!
I hope you benefited from this introduction to the concept of Debt Consolidation for those who did not know, and from the explanation of how BTCjam helps people repay their debt with lower interest rates than banks or credit card companies.
Do not waste time; get a loan now on BTCjam and see how we can be of great help in paying your debt by saving on interest. If you know someone with debt, recommend BTCjam.
After all, a true friend does not let a friend struggle.