Are small loans low risk for consumers? Our experience with buy-now-pay-later and payday loans tells us ‘no’. Check our new factsheet explaining the role of creditworthiness assessment for small loans
Credit can help consumers to cover expenses requiring a high up-front investment or which may come unexpectedly, like a new washing machine. At the same time, credits cannot and should not replace a social safety net to cover the costs for essential needs. Whether credit is the right solution very much depends on the consumer’s ability to pay back the money. Unaffordable credit is not beneficial for the consumer as it will most likely increase the gap in their budget rather than diminishing it. Therefore, a thorough creditworthiness assessment is key to avoid over-indebtedness.
The current negotiations on the Consumer Credit Directive (CCD) have generated several discussions around creditworthiness assessments, especially for small loans. Small loans have often been presented as low risk and creditworthiness assessments as too burdensome in proportion to the risk for the creditor. This document aims to respond to the key questions raised in the debate and provides recommendations for a sound creditworthiness assessment for small loans.