What makes credit so risky? A consumer perspective

26 June 2019


Finance Watch’s research paper on consumer credit and its contribution to over-indebtedness.

This paper explores the kinds of risks that consumers might be exposed to when using credit. The origin of these risks is in both the nature of credit itself (its terms and conditions) and the asymmetry of power between creditors and borrowers.

These risks have been studied for more than 4,500 years, by politicians, theologians and philosophers, many of whom have set out what – if any – protective measures should be put in place to curb unfair or exploitative lending activity.

As a result, the paper starts with the origin of credit regulation; since so many authors have written on this subject, this first section is necessarily based on a small and subjective selection. What were the problems they faced, and what solutions were applied when trying to overcome them? Interesting lessons emerge from the consistency of both the difficulties themselves and the laws and policies used to address them over the last four thousand years or so.

The second section analyses the current situation, through the lens of the 2008 Consumer Credit Directive recitals. What are the problems encountered today, given the development of the consumer credit industry? The analysis sets out the broad understanding of the risks associated with consumer credit, as well as the somewhat limited parts that the Directive directly addresses.

The third section offers a deeper analysis of the two main risks identified in the previous sections.

The fourth section looks at some of the factors limiting the effectiveness of current credit regulation.

The final section suggests that there might be parallels with the concept of toxicity, when evaluating the risks of credit use – and explores how consumer credit regulation might benefit from similar precautionary principles to those already used for chemicals or drugs.