Factsheet – Creditworthiness assessment for small loans: the key to prevent consumer over-indebtedness

25 April 2022

Position paper

Small loans are high risk for consumers, in particular for vulnerable consumers. Sound creditworthiness assessments are therefore necessary for small loans. This factsheet co-published by a European Coalition of NGOs on the Consumer Credit Directive provides recommendations for a sound 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.