Consumer Loan

From Open Risk Manual

Definition

Consumer Loan denotes any of a wide array of loan products used by consumers: It includes motor (car) finance, student loans, lines of credit. Consumer loans are distinct from credit card debt and mortgage debt secured against property.

Loan Types

There is a very large variety of consumer loan types:

  • Duration: Loans are typically of short to medium duration (up to a few years)
  • Interest rate calculation: can be fixed or variable (floating) and reference various rates, even foreign currency rates
  • Whether the loan is unsecured or with collateral (e.g. the car)
  • How funds are advanced (line of credit, term loan, installments)

Credit Risk

Due to relatively shorter maturities, the primary risk with loans is credit risk. It is a type of retail credit risk, namely the legal entity that may default on the loan contract is a Natural Person. Correspondingly the obligations and legal framework that is applicable in such a case is determined by the laws governing the responsibilities of natural persons for honouring their financial contracts. These laws vary considerably from country to country

In common with other credit risk types, loan credit risk can be decomposed into Default Risk and Recovery Risk. Since many consumer loans do not have any collateral, recovery risk can be significant.

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