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The Determinants of Consumer Credit: A Review of the Literature

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Consumer Credit in Europe

Part of the book series: Contributions to Economics ((CE))

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Abstract

The literature of consumer credit is sizeable. Such a body of work reflects not only the composite nature of unsecured debt, but also the fact that different methodological approaches exist depending on the research questions under analysis and the objectives sought.

Four main approaches can be seen: a management approach, which focuses on the characteristics of the credit industry, its workings and the policies adopted by supply-side players; a legal approach, which investigates the impact the regulatory framework has on competition and consumer protection; a socio-psychological approach, which analyses how individuals are affected by consumption behaviour and indebtedness choices; an economic approach, which for the most part concentrates on the determinants of the demand for and supply of consumer credit and on an analysis of the characteristics of individuals and households in debt.

In this chapter we will discuss the economic approach with the aim of providing an outline of the individual and institutional factors that are considered in the literature as determinants of consumer credit, its diffusion and distribution amongst different segments of the population.

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Notes

  1. 1.

    Although the two theories use different economic models, both envisage similar consumption behaviour patterns. For the purposes of this work, therefore, the names of both will be considered as equivalents.

  2. 2.

    For an analysis of the dynamic consumption theory, see Bagliano and Bertola (2004).

  3. 3.

    See Sect. 1.5 for a summary of the variables influencing the demand for and supply of credit.

  4. 4.

    The term “household” refers in the literature both to an individual and a family with personal loan commitments. For this reason when reference is made in this work to “household unsecured debt” the terms “individual” and “family” are considered as synonyms.

  5. 5.

    Asymmetric information, deriving from the fact that borrowers have more information regarding the probability of default in comparison to lenders, gives rise to problems of adverse selection and moral hazard. The first, which occurs during the evaluation of the borrower's financial position aimed at deciding whether to grant the loan and if so at what price, refers to situations in which those borrowers prepared to pay higher rates of interest presumably represent a higher level of risk as they know that the probability of repaying the loan is low. Moral hazard occurs after the loan has been granted; the higher the rate of interest, the greater the probability is that borrowers will embark on high risk projects and consequently lenders will apply a price beyond which the loan application will be rejected (Stiglitz and Weiss 1981; Frexias and Rochet 1997).

  6. 6.

    For an overview of the literature of credit scoring and the personal characteristics associated with insolvency risk see Thomas et al. (2002) and a dedicated edition of the Journal of Operational Research Society (January 2001).

  7. 7.

    Net wealth being an individual's total financial and real assets after deducting financial liabilities.

  8. 8.

    Rationality as a concept adopted in economic theory consists in a series of hypothetical, regularised preferences on the part of an individual described by their utility function.

  9. 9.

    For an analysis of the reasons for over-indebtedness see Chap. 4 and Sect. 4.2.2 in particular.

  10. 10.

    This emerges clearly as regards institutional variables: if, on one hand, the existence of inefficient justice systems increases the demand for credit because this raises the number of strategic insolvencies, on the other, due to lengthy and costly credit recovery times, lenders reduce the levels of credit they are prepared to make available. As regards also psychological factors, the variables examined should have the opposite effect on the demand for credit in respect of the influence they exert on the supply side. However, in this case, i.e. information relating to personal inclinations, the problems for lenders generated by asymmetric information are particularly acute.

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Authors and Affiliations

  1. Università degli Studi di Milano, Department of Economics, Business and Statistics, Via Conservatorio 7, 20122, Milan, Italy

    Professor Daniela Vandone

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  1. Professor Daniela Vandone
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Vandone, D. (2009). The Determinants of Consumer Credit: A Review of the Literature. In: Consumer Credit in Europe. Contributions to Economics. Physica-Verlag HD. https://doi.org/10.1007/978-3-7908-2101-7_2

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