Finansinspektionen’s analysis of the non-mortgage lending market shows that most loans issued are small loans with a high effective interest rate and a short maturity. However, the majority of new lending has been driven by larger loans, and these loans are growing at the fastest rate. The households with the highest income take out the largest loans. If the interest rate rises, many borrowers will need to use a large part of their income to make their interest and amortisation payments
FI has analysed the non-mortgage lending market by studying 380,000 borrowers at 34 different firms.
The majority of new lending has been driven by larger loans, and these loans are growing at the fastest rate. The growth of larger loans has been particularly strong during the past five years. This time period coincided with a strong Swedish economy and low interest rates. In addition, the mortgage cap and new amortisation rules may also have contributed to the growth in non-mortgage lending.
As non-mortgage lending represents only 18% of Swedish household debt it poses limited risks to financial stability. But non-mortgage lending can have a big impact on the finances of individual consumers. Every seventh loan issued was subsequently referred to a debt collection agency or department. This may be a sign that many borrowers are experiencing difficulties in repaying their loans. The share of borrowers who were referred for debt collection is significantly lower for loans where the creditworthiness assessment included a discretionary income calculation. Both households with new loans and those with existing debt spend on average one quarter of their income on interest and amortisation payments. If the interest rate were to rise, this share will increase.
One of Finansinspektionen's (FI's) statutory objectives is to secure a high level of protection for financial services consumers. This is one of the reasons why FI monitors the growth of Swedish household debt. All borrowing is potentially associated with risks for borrowers and lenders as well as the economy at large. Swedish household debt largely consists of mortgages, but it also includes non-mortgage borrowing. FI has analysed the Swedish non-mortgage retail lending market in order to strengthen our understanding of the market and any risks it may pose to consumer protection or financial stability.
As non-mortgage lending represents only 18% of Swedish household debt it poses limited risks to financial stability. However, our analysis shows that this market can lead to risks for individual consumers. Interest and amortisation payments on non-mortgage lending accounted for a significant portion of households' total borrowing costs. There are borrowers who are already showing signs of repayment difficulties today. A greater number are at risk of financial difficulty if their financial circumstances change for the worse. This indicates that many borrowers might need to reduce their expenditure when interest rates rise, which could negatively impact economic growth.
The majority of loans to retail consumers in 2018 were small and had a high effective interest rate. This was because the term of the loan was usually short and the fees charged were large in relation to the size of the loan. A borrower taking out multiple small loans may accumulate a larger debt, especially if the borrower extends or renews the original loan. This increases the risk of the borrower being unable to afford the loan repayments.
However, the majority of new non-mortgage lending consisted of larger loans. The growth of larger loans has been particularly strong during the past five years. This time period coincided with a strong Swedish economy and low interest rates. In addition, the mortgage cap and amortisation requirement may also have contributed to the growth in non-mortgage lending.
Our analysis shows that the largest loans were issued to the borrowers with the largest income. This is positive from a consumer protection and financial stability perspective. But the borrowers who took out the largest new loans spent on average one-fourth of their post-tax income on interest and amortisation payments.
FI's analysis shows that every seventh loan issued was subsequently referred to debt collection agency or department. This is likely a sign that many borrowers are experiencing problems repaying their loans. For loans where the borrower was subject to a more extensive creditworthiness assessment by means of a discretionary-income calculation, this figure was one in twenty. This indicates that loans that are subject to a more thorough creditworthiness assessment are less likely to be referred for the debt collection. In most cases, lenders conduct a more thorough creditworthiness assessment for larger loans.