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Consumer Debt and Poverty: the Default Risk Gap

Author

Listed:
  • Lucía Bertoletti

  • Fernando Borraz

  • Graciela Sanroman

Abstract

This paper examines the disparity in default risk between vulnerable and non-vulnerable populations in consumer lending. We merge an exhaustive registry of loans granted in the financial system with microdata on vulnerable individuals applying for social programs. We estimate the sources of this disparity and how loan and individual characteristics influence the probability of default. We find that vulnerable individuals have a higher risk than non-vulnerable individuals. However, this difference is reduced when individual debt charac- teristics, particularly the interest rate, are considered. Specifically, interest rates explain at least 30 percent of the risk gap. We also find that the default probabilities faced by lending firms are higher than those faced by banks, but we show that this effect is partly due to interest rate divergences. Our study underscores the importance of considering individual characteristics, loan characteristics, and interest rates when assessing default risk. While recognizing their limitations, these results suggest the need for policy interventions to pro- mote financial inclusion, fair interest rate practices, and financial education, especially for vulnerable populations.

Suggested Citation

  • Lucía Bertoletti & Fernando Borraz & Graciela Sanroman, 2024. "Consumer Debt and Poverty: the Default Risk Gap," Documentos de Trabajo (working papers) 0524, Department of Economics - dECON.
    • Handle: RePEc:ude:wpaper:0524
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    File URL: https://hdl.handle.net/20.500.12008/43892
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    Blog mentions

    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. ¿Deuda paga deuda?
      by Elisa Failache in Razones y personas: repensando Uruguay on 2024-09-19 19:14:00

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    2. Tenenbaum, Victoria & Vigorito, Andrea, 2025. "Public transfers, food consumption and dietary diversity. The case of Tarjeta Uruguay Social," Food Policy, Elsevier, vol. 132(C).
    3. Jesse Thibodeau & Hadi Nekoei & Afaf Taik & Janarthanan Rajendran & Golnoosh Farnadi, 2025. "Balancing Profit and Fairness in Risk-Based Pricing Markets," Papers 2506.00140, arXiv.org, revised Jun 2025.

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    Keywords

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    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • G51 - Financial Economics - - Household Finance - - - Household Savings, Borrowing, Debt, and Wealth

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