Estonian quick loan market in turmoil – payment orders vs. debt collection proceedings

Courts have suspended processing payment orders for quick loan debtors, which could destroy the business model of quick loan companies and create a huge amount of additional work for debt collection agencies.

The problem is that quick loan companies often grant loans irresponsibly without checking their customers’ actual solvency. They frequently limit themselves to checking with the tax and customs authorities without investigating the customer’s expenses. As a result, loans are also issued to people who are clearly unable to repay them. 

• Around 10% of the working-age population is estimated to struggle with debt, with many having several or dozens of loans.

For quick loan companies, limiting payment orders could mean the end of their business, as they may not receive interest in court proceedings, only the principal amount. Court proceedings often reveal that the claims are unfounded, as responsible lending principles were not followed when the loans were issued.

At the same time, restricting payment orders makes debt proceedings more expensive—the costs of legal proceedings are up to 20 times higher for the debtor and prolong them for years!

Types of payment orders in Estonia

In Estonia, payment orders and court proceedings are distinguished as civil proceedings with different objectives, procedures, and application areas. Here are the main differences between them:

1. Payment order

• • Definition: A payment order is a simplified procedure for collecting smaller, clearer, uncontested monetary claims (e.g., debts and unpaid bills).
  • Purpose: A quick, cost-effective solution that does not require full court proceedings.
  • Procedure:
    • The claimant submits an application to the court (e.g. via e-file) setting out the grounds for the claim and providing evidence (e.g. contract, invoice).
    • The court examines the application without notifying the defendant and may issue a payment order without a hearing.
    • If the defendant does not contest the payment order within 15 days, it becomes enforceable (similar to a court judgment).
    • If the defendant contests the claim, the case may proceed to court proceedings.

• Conditions

• • • The claim must be monetary, usually up to €6,400 (simplified procedure limit).
    • The claim must be clear and proven (uncontested).

• Advantages

• • • Faster (usually within a few weeks).
    • Cheaper (lower court fees).
    • Less formal.

• Disadvantages

• • Only suitable for uncontested claims.
  • If the defendant contests the claim, the procedure becomes a court proceeding.

2. Court proceeding

• • Definition: Action proceedings are full court proceedings used to resolve disputes where the parties cannot reach an agreement (e.g., complex contract disputes, claims for damages, division of property).
  • Purpose: Thorough and fair resolution of disputes through the courts.
  • Procedure:
    • The plaintiff files a claim with the court, setting out their claims, arguments, and evidence.
    • The court notifies the defendant, who can file a response.
    • Court hearings are held, where the parties present their arguments, witnesses, and evidence.
    • The court issues a decision, which may be enforceable.

• Conditions

• • • Suitable for all types of civil disputes, including non-pecuniary claims (e.g., contract cancellation, protection of honour).
    • No limit on the amount of the claim.

• Advantages

• • • Allows for a thorough examination of the dispute.
    • Suitable for more complex and contested cases.

• Disadvantages

• • Slower (may take months or years).
  • More expensive (higher court fees and possible legal fees).
  • More formalities and procedural requirements.

Lenders may end up without interest

Jonna Pechter, CEO of Bigbank, stated that the reform will unlikely affect banks, as their lending processes involve more rigorous checks. However, some credit providers operate without requesting documentation, appealing to consumers through convenience.

A Ministry of Finance partner has proposed several frameworks for the planned loan register. “They just perform a registry check and issue the loan,” Pechter explained. “If this is how small loans are granted, that model may no longer be viable.”

She suggested many quick loans could be legally contested, with lenders recovering only the principal, not the interest, during litigation. While this would notably affect the short-term loan sector, it would have little influence on banks, given their limited exposure to that market.

Pechter acknowledged that while some users of fast loans might qualify for bank credit, many likely would not. “There’s also a large portion who’ve been rejected by banks,” she added.

Collection agencies to feel the impact

Argo Virkebau, CEO of Aktiva Finance Group, which owns Julius Inkasso, warned that ending automated systems would raise debt collection costs for agencies and borrowers. He criticised the restriction on payment orders, noting that lawsuits are significantly more expensive for debtors.

“The debt remains. I don’t see how this is fair,” he said, rejecting claims that agencies overcharge. He stressed that overall costs tend to align between payment orders and lawsuits.

Virkebau agreed that responsible lending must be enforced, but highlighted that over-complication increases the debtor burden. “When everything must be done manually, costs skyrocket,” he warned.

He supported government efforts to promote accountability in lending. Still, he cautioned that the reform could result in years of delays and a tenfold workload, forcing collection agencies to recruit more staff.