FI Analysis 29: Why do some borrowers experience payment problems?

2021-02-24 | Reports Consumer

Young borrowers and borrowers with low income have a higher risk of experiencing payment problems when taking non-mortgage loans. The risk decreases if the credit providers conduct more thorough credit assessments. These are the conclusions drawn in a new report from Finansinspektionen (FI).

Our analyses show that young borrowers have the highest probability of experiencing payment problems shortly after taking a new non-mortgage loan. Similarly, borrowers with low income run a higher risk of repayment problems. The probability of repayment problems decreases if the borrower has high income or surplus discretionary income.

The probability of repayment problems increases if the borrower has large interest and amortisation payments in relation to their income (credit service ratio). The credit service ratio still contributes less, though, to the explanation for the payment problems than the factors age, income and discretionary income.

If credit providers undertake in-depth credit assessments using information that includes consumers' existing loans, the risk of repayment problems decreases. This holds for all groups of borrowers.

One further conclusion drawn is that borrowers of small loans experience early payment problems more often than borrowers of large loans. This is most likely not due to the size of the loan itself. Rather, it reflects that borrowers with small margins often take small loans while credit providers rarely conduct an in-depth credit assessment for small loans. When considering differences in income and credit assessments, we find that the risk of payment problems increases with the size of the loan.