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Loans for Better Living: The Role of Informal Collateral

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  • Gabriela Kuvikova

Abstract

Consumers with insufficient resources can finance purchases by applying for specific purpose loans or unspecified purpose loans. I examine the default gap of these two types of loans by using a unique dataset of consumer loans from a Czech commercial bank. In line with theoretical models that perceive collateral as a screening device mitigating adverse selection, the paper confirms a negative relationship between the default rate and the presence of informal collateral. More importantly, it is not the purpose for the loan, but mainly the unobserved characteristics of the borrower that drive the default rate. The paper also provides empirical evidence that the interest rate differential between specific purpose loans and unspecified purpose loans is systematically higher than their default rate differential.

Suggested Citation

  • Gabriela Kuvikova, 2015. "Loans for Better Living: The Role of Informal Collateral," CERGE-EI Working Papers wp541, The Center for Economic Research and Graduate Education - Economics Institute, Prague.
    • Handle: RePEc:cer:papers:wp541
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    Keywords

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    JEL classification:

    • D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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