An Analysis of Finnish Debtors Who Defaulted in 2014–2016 Because of Unsecured Credit Products

Abstract

Consumer credit has become an important element of the economy despite the negative effects: Over-indebtedness has wide-ranging repercussions affecting consumers and society as a whole. We analysed the debt judgements (N = 4,095) of Finnish district courts from 2014 to 2016, as well as administrative data on debtors. Our focus was on the position of consumers on the credit market and their consumption-related problem debts, namely instant loans, extensive consumer credit, and credit-card as well as distance-selling indebtedness. Regarding the four credit products, first we considered the average amount of outstanding debt and then we looked at the sociodemographic and socioeconomic characteristics of the debtors. The results revealed that the average outstanding debt (€) varied according to the credit product and that the highest average amount originated from extensive consumer credit. Instant loans and distance-selling indebtedness caused debt problems especially among low-income young adults, adverse selection seemingly being one factor behind instant-loan-related debts. Extensive consumer credit and credit-card indebtedness were behind debt judgements against older consumers with a good socioeconomic position and numerous previous loans. This is a moral-hazard situation whereby borrowers may have more information about their total amounts of debt than the lenders. We suggest that, in many cases, debt problems reflect an abundant supply of consumer credit, which seems to foster asymmetric information, the consumer’s position and competence to act in the credit market, as well as various overall risk factors. The findings highlight the need to strengthen consumers’ financial skills and for loan products that meet the needs of low-credit-rated consumers. Moreover, lenders should act responsibly in the current credit market.