There are different types of lenders. They offer different types of loans, and their risk tolerance varies. The risk tolerance is evident in their business model, which consists in part of how they conduct their credit assessment. There are also different types of borrowers. Some want small loans, and others want big loans. Both the lender’s credit assessment and the borrower’s repayment capacity are often better for large loans. The small loans represent a large share of early repayment problems – reminders and collection notices. But the borrower can often pay back small loans before they are registered with the Swedish Enforcement Authority.
Since lenders and borrowers differ, every loan is the result of matching. The borrowers with the best repayment capacity normally may borrow from a lender with low risk tolerance, and therefore these loans normally have a low interest rate. Borrowers with weaker repayment capacity more often may borrow from a lender with higher risk tolerance and therefore pay a higher interest rate. Borrowers with the worst repayment capacity in most cases may only borrow from lenders with the highest risk tolerance.
Large banks and non-property-backed financing companies often conduct more thorough credit assessments than niche banks and consumer credit institutions. Therefore, a relatively low percentage of borrowers from large banks and non-property-backed financing companies have their debt registered with the Swedish Enforcement Authority: 0.1–0.2 per cent. In contrast, 0.4 per cent of those who borrow from a niche bank and 2.3 per cent of those who borrow from a consumer credit institution have their debt registered with the Swedish Enforcement Authority every year. This can be explained in part by the credit assessment and other differences in the risk tolerance that our data cannot capture. But our analysis indicates that consumer credit institutions grant loans to customers with the lowest repayment capacity. This is evident in both the interest rate and the share that have their debt registered with the Swedish Enforcement Authority.
Michael K. Andersson and Mehmet Üye *
Andersson works at FI and Üye at the Swedish Enforcement Authority.
The FI Analysis series is presented at an internal seminar at FI. The reports are approved for publication by an Editors' Board.
* The authors would liked to thank in particular Johan Almenberg, Henrik Braconier, Anders Dölling, Lars Hörngren, Gustav Förster, Magnus Karlsson, Maciej Kochanowicz, Per Nordkvist, Lars Olausson, Marie Olausson, Jonas Opperud, Mats Ossung, Therése Rosén and Stefan Palmqvist.