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Most loans for consumption are small and have a high effective interest rate and a short maturity. Households with large loans represent the largest share of new lending, though, and the large loan segment is growing the fastest. Households with high income have the largest loans. Borrowers with mortgages normally have larger consumption loans than borrowers without mortgages. These are some of the results from FI’s mapping of consumption loans, Swedish Consumption Loans 2018.
Finansinspektionen has mapped the market for consumption loans by analysing 148,000 borrowers at 20 different firms.
Of the consumption loans included in the analysis, most are small and have a high effective interest rate. This is because the maturity is normally short and the fees that are charged are large in relation to the size of the loan. Households with large loans represent the largest share of new lending, and it is also the large loan segment that is growing the fastest. This increase has been particularly large the past four years, a period which has featured a strong economy and low interest rates. In addition, the mortgage cap and the amortisation requirement may have contributed in part to the increase in the use of large consumption loans for housing purposes and other purchases.
Consumption loans represent a small percentage of household debt, so they constitute only a limited stability risk. However, consumption loans affect household finances. Households with large consumption loans spend on average one-fourth of their income on interest rates and amortisation payments. If these households also have mortgages, they pay even more.
Report Summary
Finansinspektionen (FI) follows the development of household debt on an ongoing basis. Debt can lead to risks for borrowers and lenders as well as the economy at large. Household debt largely consists of mortgages, but also of consumption loans. In order to better understand consumption loans, we have mapped the market.
Most consumption loans are small and relatively expensive. They have a high effective interest rate. This is because the maturity is normally short and the fees that are charged are large in relation to the size of the loan. However, it is large loans that represent the largest share of new lending, and it is also these loans that are growing the fastest. The increase has been particularly large the past four years, a period which has featured a strong economy and low interest rates. In addition, the mortgage cap and the amortisation requirement may have contributed in part to the increase in the use of large consumption loans for housing purposes and other purchases.
Borrowers with the highest income take the largest loans. Households with mortgages normally have larger consumption loans than households without mortgages. Small loans can be the start of larger debt if the borrower replaces or increases the loan instead of paying it off. In the long run, this could result in the borrower becoming over-indebted.
Lenders conduct their credit assessments differently. In general, the assessment is more thorough for larger loans. A loan-to-income ratio has been calculated for almost all borrowers who take large loans. Fifty percent of the loans granted for more than SEK 100,000 have been preceded by a calculation of the household's monthly surplus.
Because consumption loans represent a small percentage of household debt, they constitute only a limited stability risk, but consumption loans affect household finances. Households with large consumption loans spend on average one-fourth of their income on interest rates and amortisation payments. If these households also have mortgages, they pay even more. FI's stress test shows that many borrowers could find themselves in a difficult economic situation if interest rates were to rise or they were to experience a loss of income. Some borrowers may even experience problems repaying their loans since their expenses exceed their income.
This report maps the market for consumption loans and focuses on potential risks associated with these loans. In order to gain better insight into the effect of consumption loans on borrowers' finances, we will continue to follow the market.
