Consumer Over-Indebtedness, Credit Contracts and Responsible Lending

Responsible Consumer Lending

Costly Contracts and Consumer Credit∗

Abstract This paper explores the implications of technological progress in consumer lending. The model features households whose endowment risk is private information, and intermediaries which observe a noisy signal of each borrower’s default risks. To offer a lending contract, an intermediary incurs a fixed cost. Each lending contract is comprised of an interest rate, a borrowing limit and a s...

Increasing Indebtedness, Institutional Change and Credit Contracts in Peru

* We are in debt to a number of persons that helped us during this research. First, we t thank IEP and CEPES for providing a congenial place to work and discuss our hypotheses and progress. In these two institutions we thank Cecilia Blondet, IEP's Cajavilca for their support. We give special thanks to Hildegardi Venero for her wonderful assistance at the research stage. Second, we thank the ent...

COSTLY CONTRACTS AND CONSUMER CREDIT Igor

Financial innovations are a common explanation of the rise in consumer credit and bankruptcies. To evaluate this story, we develop a simple model that incorporates two key frictions: asymmetric information about borrowers’ risk of default and a fixed cost to create each contract offered by lenders. Innovations which reduce the fixed cost or ameliorate asymmetric information have large extensive...

The impact of credit scoring on consumer lending

We study the adoption of automated credit scoring at a large auto finance company and the changes it enabled in lending practices. Credit scoring appears to have increased profits by roughly a thousand dollars per loan. We identify two distinct benefits of risk classification: the ability to screen high-risk borrowers and the ability to target more generous loans to lower-risk borrowers. We sho...