Consumer loans in Israel
Recent surveys published in Israel show that almost 70% of households are overdrawn.
The fact that the rise in the cost of living is higher than the rise in the average wage, combined with the fact that Israelis rarely go without an expensive family vacation abroad or a state-of-the-art car, to name but two examples, often means that their bank account is permanently in the red.
The subject of indebtedness has become even more topical in recent weeks, with the economic crisis caused by the Coronavirus hitting the Israeli economy with full force, resulting in the loss of jobs or unpaid leave for many employees, and a total loss of business for most self-employed entrepreneurs.
What options does the Israeli banking system offer?
The Bank of Israel corroborates this by pointing out that Israeli household indebtedness is currently at an all-time high.
For consumers wishing to limit or even completely cover their bank overdraft, or to benefit from liquidity in these times of economic crisis, there are several ways of taking out a consumer loan, each with its own very specific characteristics, which are often opaque and difficult to decipher in the many pages detailing the conditions that the customer must sign in order to receive the loan.
In general, a borrower will turn first and foremost, almost by reflex, to his or her bank to apply for a loan, even if bank loans often turn out to be the least advantageous in terms of conditions. In fact, it appears that the interest rate charged by banks varies from 3% to over 12% (!!), often based on the borrower's profile.
If the bank refuses the loan application, or if the borrower quite rightly wishes to limit the cost of borrowing, he can turn to financial institutions specializing in consumer loans, most of which are credit card companies (Cal, Isracard, Mimun Yashir etc.). The rates charged by these companies are sometimes lower than those offered by the bank, especially for customers with a good banking profile, but can also be very high for borrowers who have been categorically refused a loan by their bank, and who are therefore obliged to turn to other financial institutions to obtain a loan.
Consumer loans by pledging Keren Pensia or Keren Ishtalmut
For the more discerning consumer, Israel offers the possibility of borrowing at much more attractive rates, by pledging a retirement savings plan. (keren pensia and bituah' menahalim) or a keren ishtalmut (the equivalent of a company savings plan).
As a reminder, in Israel, all salaried employees benefit from a nominative retirement account, as contributions are compulsory and the responsibility to contribute lies with the employer. Since 2017, self-employed workers have been required by law to contribute to a pension fund (with some exceptions).
It is possible to apply for a retirement account loan of the following type keren pensia or bituah' menahalim 30% of current retirement savings - not including redundancy payments (pitsuyim). Practical interest rates are generally around 2.5%.
Visit Keren Ishtalmut is a savings plan subscribed to in a professional capacity, either as an employee or as a self-employed person, which entitles the holder to substantial tax benefits. As contributions to this type of program are not compulsory, only a fringe of the working population benefits from this type of savings scheme. The Keren Ishtalmut is a financial product that can be invested in a variety of vehicles, including equity portfolios, bond portfolios or combinations of financial securities. These savings are blocked for the first 6 years from the date of opening, but you can continue to let them grow thereafter, while retaining your right to liquidity.
It is possible to borrow up to 50% of savings if they are still locked in (within the first 6 years from the opening date), and up to 80% of savings if they are already "liquid" (after the 6 years). Practical rates on this type of loan are particularly low, ranging from 1,25% to 2,25%, depending on the financial products investment company (batei hashkaot).
The benefits of borrowing rather than releasing keren ishtalmut when liquid lies in the possibility of taking out a bullet loan, i.e. paying interest only during the loan period and repaying the capital only at the end of the loan term. This enables you to leverage the returns on your savings, which are generally much higher than the interest rate on the loan, and are exempt from capital gains tax, although it is important to note that returns are never guaranteed.