Root causes of household over-indebtedness

19 October 2022

Policy brief

Without strong consumer protection legislation and proper public social security systems, the risk of financial difficulty is left to chance, making people vulnerable to predatory schemes. In this short policy brief, Finance Watch takes a closer look at the root causes of over-indebtedness and highlights the steps policymakers can take to better protect households across Europe.

What is over-indebtedness? While anyone can be unlucky, why are some more vulnerable to over-indebtedness than others? How do unexpected life events fit into this story? Do some financial products increase the risk of over-indebtedness more than others? How can regulation and the right market structures help prevent people from finding themselves in this situation?

This policy brief sets out to give a short introduction into this important topic and to answer these questions. With the cost-of-living crisis hitting families across Europe hard, understanding what over-indebtedness is and becoming more familiar with the ways policymakers can address this challenge has never been more important.

Right now, EU policymakers are reviewing the Consumer Credit Directive (CCD). Financial products like consumer credit can help consumers purchase goods and services which may otherwise be out of reach. However, consumer credit  products, including new small-value loans such as payday loans, buy-now-pay-later schemes (BNPLs), and deferred debit cards, can lead to over-indebtedness if they are not properly regulated. This is especially concerning as the cost-of-living crisis could push more households on a limited budget to turn to these small-value, high-risk loans to purchase essentials, like food and energy. What’s more, the current inadequacy of creditworthiness assessment rules, which assess a borrower’s ability to afford a loan, make households more vulnerable to being mis-sold a loan and thereby becoming over-indebted.

Finance Watch is calling on policymakers to address the shortcomings of the Consumer Credit Directive to help reduce the risk of citizens across Europe being overwhelmed by their debts. If you would like to know more or collaborate on this key issue, please contact Peter Norwood at